Abstract
Previous literature shows that in the presence of staggered price setting, high trend inflation induces not only a large loss in steady-state output relative to its natural rate but also indeterminacy of equilibrium under the Taylor rule. This paper examines the implications of a “smoothed-off” kink in demand curves for the natural rate hypothesis and macroeconomic stability using a canonical model with staggered price setting. An empirically plausible calibration of the model demonstrates that the kink in demand curves mitigates the influence of high trend inflation on aggregate output through the average markup and (when relevant) the relative price distortion, thereby ensuring that the violation of the natural rate hypothesis is minor and preventing indeterminacy caused by high trend inflation.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
