Trendinflation,wageandpricerigidities,andproductivitygrowth

What arethesteady-stateimplicationsofinflationinageneral-equilibriummodelwith real percapitaoutputgrowthandstaggerednominalpriceandwagecontracts? Surprisingly,abenchmarkcalibrationimpliesanoptimalinflationrateof 1:9 percent. The analysisalsoshowsthattrendinflationhasimportanteffectsontheeconomywhen combinedwithnominalcontractsandrealoutputgrowth.Steady-stateoutputand welfare lossesarequantitativelyimportantevenforlowvaluesoftrendinflation. Further,nominalwagecontractingisfoundtobequantitativelymoreimportantthan nominalpricecontractingingeneratingtheresults.Thisconclusiondoesnotarisefrom price dispersion per se, butfromaneffectofnominaloutputgrowthontheoptimal markup ofmonopolisticallycompetitivelaboursuppliers.Finally,accountingfor productivity growthisfoundtobeimportantforcalculatingthewelfarecosts of inflation.Indeed,thepresenceof2percentproductivitygrowthincreasesthewelfare costs ofinflationinthebenchmarkspecificationbyafactoroffourrelativetotheno- growthcase.