Price stickiness, trend inflation, and output dynamics: a cross-country analysis

Sticky price models based on menu costs predict that countries with high trend inflation should have (i) smaller impact effects of demand shocks on output and (ii) less persistent output fluctuations, relative to low-trend inflation countries. These predictions are tested, controlling for changes in trend inflation, using a country-specific approach. The results do not support the second prediction. That prediction is also not robust to a modified measure of trend inflation that excludes episodes of hyperinflation. These findings suggest that while price stickiness is important for understanding short-run impact effects, real propagation mechanisms may drive persistence in output fluctuations.