Trend Inflation, Nominal Rigidities, And Endogenous Growth Preliminary And Incomplete
Source: Bank of Canada
The authors study the implications of trend inflation for an economy's long-run growth rate. To do so, they extend a New Keynesian model to allow for endogenous growth. The defining characteristic of the New Keynesian framework is that inflation and nominal price stickiness together induce relative price dispersion and thus reduce monopoly profits. When the framework is embedded in an endogenous growth model with expanding variety (Romer 1990), the impact on monopoly profits in turn reduces the return to innovation, and a link between inflation and the growth rate emerges.