The Macroeconomic Effects of Nonzero Trend Inflation

Abstract

We study the macroeconomic effects of nonzero trend inflation in a simple dynamic stochastic general equilibrium model under three common time‐dependent pricing schemes: Calvo, truncated‐Calvo, and Taylor. We show that, regardless of the pricing mechanism, trend inflation leads to a reduction in the stochastic means of output, consumption and employment, and an increase in the stochastic mean of inflation beyond its deterministic steady‐state level. The variability of most aggregates also increases. These effects are quantitatively much stronger with Calvo pricing.

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