ESRI Discussion Paper Series No.388 Cost of Price Rigidity under Trend Inflation: Evidence from International Trade

Hirokazu Ishise
Economic and Social Research Institute, Cabinet Office
Osaka School of International Public Policy, Osaka University

Abstract


 New Keynesian models with trend inflation exhibit an efficiency loss, known as price distortion. Is price distortion empirically relevant in the long run? To econometrically test this idea, I extend the model to a multi-country, multi-industry setting and theoretically show that a country with low inflation is relatively more productive in industries that face more sticky input prices. Consequently, in an open economy equilibrium, a country with low inflation has a comparative advantage in an industry that faces sticky input prices. World trade data support this theoretical prediction and provide evidence of price distortions in the long run.

Structure of the whole text

    • 1 Introduction
      page2
    • 2 Model
      page4
    • 3 Empirical evidence of inflation-driven comparative advantage
      page11
    • 4 Concluding remarks
      page28
    • A Data Appendix
      page30
    • B Model Appendix (Separate Appendix)
      page34
    • C Additional robustness result (Separate Appendix)
      page34
    • References
      page37
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