The Optimal Rate of Inflation with Trending Relative Prices
Federal Reserve Bank of Richmond
Two-sector New Keynesian model with trending relative prices across sectors (goods vs services), differential productivity growth rates, and heterogeneous price stickiness across sectors. Analyzes both time-dependent (Calvo/Taylor-style) and st
Linear production technology in labor with sector-specific productivity; monopolistic competition with Dixit-Stiglitz aggregation within each sector; time-dependent or state-dependent pricing with fixed costs of adjustment
Section 5.2, Figure 8
State-dependent pricing with common adjustment costs, higher demand elasticity in sector g (epsilon_g=9.4, epsilon_s=5.5, Bg=Bs=0.007)