Trend Inflation And Economic Growth In The Presence Of Nominal Price Contracts Preliminary And Incomplete

The authors study the implications of trend inflation for an economy's long-run growth rate. To do so, they extend a class of general-equilibrium monetary model known as the New Neoclassical Synthesis or the New Keynesian model to allow for endogenous growth. The defining characteristic of this class of model is that nominal price stickiness (and the relative price dispersion it induces) affects economic decisions and monopoly profits. When this framework is embedded within the endogenous growth model with expanding variety (Romer, 1990), a link develops between nominal price stickiness, trend inflation, and the economy's growth rate.