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 7
State-dependent pricing with common demand elasticity, lower adjustment costs in sector g (Bg=0.009, Bs=0.32)