Trend Inflation and Economic Growth in the Presence of Nominal Price Contracts Preliminary and Incomplete

We study the implications of trend inflation for an economy’s long-run growth rate. To do so, we extend a class of general-equilibrium monetary model known as the New Neoclassical Synthesis or the New Keynesian model to allow for endogenous growth. The defining char-acteristic of this class of model is that nominal price stickiness (and the relative price dispersion it induces) affects economic decisions and monopoly profits. When this framework is embedded within the en-dogenous growth model with expanding variety (Romer, 1990), a link develops between nominal price stickiness, trend inflation, and the economy’s growth rate. We believe this focus on nominal price rigidity is novel, as the existing literature on the link between trend inflation and growth mostly focuses on the trade-off between money holdings and other forms of saving