Trend Inflation and Firms Price‐Setting: Rotemberg Versus Calvo

We compare the Calvo and Rotemberg price‐setting mechanisms in a New Keynesian model with trend inflation. We show that: the long‐run relationship between inflation and output is positive in Rotemberg and negative in Calvo; the dynamics of the two models differ even to a first‐order approximation; positive trend inflation enlarges the determinacy region in the Rotemberg model, whereas it shrinks it in the Calvo model; the responses of output and inflation to technology shocks are amplified by trend inflation in Calvo, whereas they are dampened in Rotemberg; the two models imply differing non‐linear adjustments after a disinflation.