Price stickiness, trend inflation, and output dynamics: a cross-country analysis Hashmat Khan Structural Economic Analysis Division, Monetary Analysis, Bank of England Abstract. Sticky price models based on menu costs predict that countries with high trend inflation should have (i) smaller impact effects of demand shocks on output and (ii) less persistent output fluctuations, relative to low-trend inflation countries. These predictions are tested, controlling for changes in trend inflation, using a country-specific approach. The results do not support the second prediction. That prediction is also not robust to a modified measure of trend inflation that excludes episodes of hyperinflation. These findings suggest that while price stickiness is important for understanding short- run impact effects, real propagation mechanisms may drive persistence in output fluctuations. Viscosite´ des prix, inflation tendancielle, et dynamique de production: une analyse transversale. Les mode`les de prix visqueux fonde´s sur des menus de couˆts pre´disent que les pays qui ont une tendance a` une forte inflation devraient (i) avoir de plus petits impacts des chocs en provenance de la demande sur la production et (ii) engendrer des fluctuations de production moins persistantes, en comparaison avec ce qui se produit dans les pays a` faible inflation. Des e´tudes ante´rieures (utilisant une approche en deux e´tapes) ont supporte´ ces re´sultats. Cet article utilise une approche qui est spe´cifique au pays et permet que le comportement des prix s’ajuste en re´ponse a` des chocs dans la demande et a` des changements dans l’inflation tendancielle, et donc prend mieux en This paper is based on a chapter from my doctoral dissertation at the University of British Columbia. I would like to thank Paul Beaudry, Michael Devereux, and Jim Nason for their advice and very helpful suggestions. I would also like to thank two anonymous referees, Robert Amano, Francisco Gonzalez, Michael Kiley, Tiff Macklem, Lonnie Magee, Angela Redish, Christian Sigouin, and the seminar participants at the University of Alberta, Bank of Canada, Concordia University, University of Guelph, McMaster University, and University of Saskatchewan for useful comments. Any remaining errors are my own. The views expressed in this paper are my own. No responsibility for them should be attributed to the Bank of England. Email: Hashmat.Khan@bankofengland.co.uk Canadian Journal of Economics / Revue canadienne d’Economique, Vol. 37, No. 4 November / novembre 2004. Printed in Canada / Imprime´ au Canada 0008-4085 / 04 / 999–1020 / # Canadian Economics Association