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 4.3, Figure 5
Time-dependent pricing with flexible prices in sector s (expected duration = 1 quarter)