Trend Inflation Meets Macro-Finance: The Puzzling Behavior of Price Dispersion

Aleš Maršál, Katrin Rabitsch and Lorant Kaszab

No WP 6/2019, Working and Discussion Papers from Research Department, National Bank of Slovakia

Abstract: Motivated by recent empirical findings that emphasize low-frequency movements in inflation as a key determinant of term structure, we introduce trend inflation into the workhorse macro-finance model of Rudebusch and Swanson (2012). We show that this compromises the earlier model success and delivers implausible business cycle and bond price dynamics. We document that this result applies more generally to non-linearly solved models with Calvo pricing and trend inflation and is driven by the behavior of price dispersion, which is i) counterfactually high and ii) highly inaccurately approximated. We highlight the channels behind the undesired performance under trend inflation and propose several remedies.

Keywords: trend inflation; Calvo pricing; price dispersion; macro-finance; asset pricing (search for similar items in EconPapers)
JEL-codes: E13 E31 E43 E44 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2019-09
New Economics Papers: this item is included in nep-ict, nep-int and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Trend inflation meets macro-finance: the puzzling behavior of price dispersion (2020)
Working Paper: Trend inflation meets macro-finance: the puzzling behavior of price dispersion (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:svk:wpaper:1064

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