It's a simplifying assumption of the model. It doesn't say that no firm can ever change their prices, only that some can't, and it never said that monetary intervention always improves things, just that it can. There are still limits to monetary expansion.

Oh for sure. This is a target of model itself, I think from the late 80s or early 90s. I'm sure there's a growth model somewhere that has that in it. If not, a great paper idea!

Hey, I am using my own book that I wrote for the class. Unfortunately, I only give it out to my students.

Thanks you, sir how to join your course please.

You would have to enroll at Tennessee Tech University. This is an online course, and I post the lecture videos on KZbin for viewing.@@cha-vz9ls

Thanks! I'm actually teaching intermediate again this semester so you'll see an entirely new set of lectures coming out the next few months!

@@thenyquileconomist5747 Awesome! I am teaching intermediate Micro over the summer, but would love to have both intermediate classes somewhat prepped if I can help it. I run my KZbin channel as a way to try and have some basic concepts covered as a future resource for students

@@InCaseofEconStruggles I may send my students your way a few times, then.

Hi, I used sign restriction identification to identify the shocks in the VAR model. I would have to refer to my code to be 100% sure of what I did, but with the variables I used, I got them from the FRED, except for GDP, which came from Macro Advisers (they have a monthly real GDP variable they constructed that is very useful). I picked the lag selection based on the AIC, BIC, and HQ, and the sign restrictions were those consistent with what the New Keynesian Model would suggest. So, for a monetary policy shock, the interest rate falls, monetary aggregate increases, GDP and prices increase, and I think I put positive restrictions on the labor market stuff too. I might have left real GDP unrestricted; I can't totally remember. I went with 10,000 accepted draws using Uhlig's rejection method, and the R code is from a package called VARSignR that I got from GitHub. It's all pretty straightforward stuff for VAR modeling. Nothing too fancy.

I made a couple of videos using real data that you might want to check out (if you haven't yet). Glad you've been enjoying the lectures!

I’m in your intro online class and appreciate it lol.

I am!

You should meet mine. He holds the world trophy for worst possible way of explanation. He is the G.O.A.T in that field.

I believe so, mine too hahahaha

The solution to the standard NK model is usually approximated around a null inflation steady state -- i.e., we (usually) force the long-run inflation to be zero in the model. If you relax this assumption, you get an equation that looks like equation (8) in Cogley and Sbordone (2008): that is, a Phillips curve with expected inflation *and* two terms which usually drop out when you set trend inflation to 0. They both involve expectations across all future periods (for inflation, a discount factor and growth rates for output). Intuitively, if you set 0% long term inflation "all firms" eventually "catch up" with each other following a shock (prices stop changing one day unless the shock persists forever), but if you pick a long term inflation above 0%, then firms always have to play catch up (prices never completely stop changing even if the shocks dissipate completely). Price updates across firms have to reflect this consideration which is why you get those two infinite sum terms appended to the textbook NKPC equation. That result is for rational expectations and I don't know what happens with the NKPC if you play with adaptative expectations instead while also allowing for trend inflation. I don't think anyone derived that result, but it's not my field of expertise so I could be wrong. Now, what are you asking here is a complicated question regarding a transition. I do have a naive strategy I could implement to do that: I can numerically solve a model that allows for a positive trend inflation in steady state and do it for 1 and 2% inflation. If I pretend nobody sees the transition coming, that it somehow falls from the sky, I can *simulate* the transition: start the model at steady-state for the 2% and simulate the model's dynamic using the state-space representation of the model solved for the 1% case. I can do it with or without shocks. What would you expect to see the computer spit out? I strongly suspect that even in a very simple model, you could get qualitatively different answers depending on your calibration of model parameters. It's also not clear to me what this 'transition' I described would mean in terms of economic behavior because dropping a transition out of nowhere means the possibility of a transition was taken into account by no one in the economy. Say we overlook all of this and wonder if we could just look at it using graphics like in this video. Well, those graphics are drawn with *prices* in mind -- that is, it's about trying to take snap shots of different steps in a dynamic model where prices eventually stop moving. Maybe we could try adding a dynamic graphic on top of it all, but it's unclear how you'd circle that square. And you may also be out of luck looking in the literature: to my best knowledge, people who thought about the consequences of a central bank changing its interest rate target (you can look up, say, Louis Phaneuf or Eric sims on scholar), usually only look at business cycle dynamics. They all neglect the transition between steady states and it's all about consumption equivalents measures of welfare looses (or gains) before and after a change in steady state inflation. Maybe my lengthy comment will catch his attention and he'll have a better answer. My gut says the answer is unclear and you can only get one from numerical solutions -- but I'm an econometrician, not a theorist. I'd love to see him crack that one and then show his intuition pans out when solving the model numerically. That would be a great video.