First thank you very much for your previous guidance, I am grateful.
I have 3 questions regarding trend inflation (gross inflation target 1.02) in DSGE model.
Q1. I plan to use indexation to past inflation rate in Calvo pricing,
Define P(t) as current price, P(t-1) as past price,PAI(t-1) as past inflation, Po as optimal price, w as weight of past price P(t-1), 1-w as weight of optimal price Po
Calvo pricing equation:
In DSGE model with inflation target 1.02 in monetary policy rule, when I define calvo pricing, can i use full indexation to past inflation: P(T-1)*PAI(t-1)?
Q2. when inflation target is 1.02, P(t) has many steady states, P(t) is final good price in my model, I also have nominal intermediate good price which is related to final good price, does it mean nominal intermediate good price also have many steady states? I mean does nominal variables whose steady state depends on P(t) also have many steady states?
Q3. will this lead to indeterminancy problem in estimation?
Thank you very much!