Indeterminacy, Trade Openness, Trend Inflation and Heterogeneity in Price Stickiness

We reformulate the standard open economy new Keynesian model to include positive trend inflation and heterogeneity in price stickiness suggested by micro-data on prices. We show that when trend inflation is positive, in the standard (single sector) version of the model, increasing trade openness shrinks the determinacy region. Heterogeneity in price stickiness magnifies this effect, resulting even a smaller determinacy region. When trend inflation is zero, an increase in trade openness enlarges the region. These results emerge because trend inflation inverts the sign of the slope of the long-run Phillips curve to negative and trade openness makes it more negative