The New Keynesian Phillips curve under trend inflation and strategic complementarity

This paper shows that for standard calibration of the [Calvo, G., 1983. Staggered prices in a utility-maximizing framework. Journal of Monetary Economics 12, 983-998] model of price stickiness and under strategic complementarity, the optimal price is only defined for trend inflation rates of under 5.5%. This threshold is much lower than previously recognized, and below the average inflation rate in several industrialized countries. Furthermore, over the range for which the optimal price is defined, the slope of the New Keynesian Phillips curve is decreasing in trend inflation. That contradicts the stylized fact that the Phillips curve is flatter in low-inflation environments. Allowing the Calvo, price signal to vary with trend inflation can help avoid these implications. (c) 2006 Published by Elsevier Inc.