Trend inflation and an empirical test of real rigidities

Michal Marenčák

Publication: Working/Discussion PaperWU Working Paper

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Abstract

Positive trend inflation resolves the observational equivalence of various sources of real rigidities which are first-order equivalent under zero trend inflation. This paper builds on this observation to assess the empirical performance of three widely used types of real rigidities — firm-specific capital, firm-specific wages and a kinked-demand curve — in matching the U.S. inflation dynamics. Firm-specific wages outperform the kinked-demand curve and firm-specific capital in terms of empirical fit. We document that positive trend inflation might reduce the ability of firm-specific factors to prolong the real affects of monetary disturbances.
Original languageEnglish
Place of PublicationVienna
PublisherWU Vienna University of Economics and Business
Publication statusPublished - 1 May 2022

Publication series

NameDepartment of Economics Working Paper Series
No.323

WU Working Paper Series

  • Department of Economics Working Paper Series

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