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Trend inflation, wage and price rigidities, and productivity growth

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  • Amano, Robert
  • Moran, Kevin
  • Murchison, Stephen
  • Rennison, Andrew

Abstract

What are the steady-state implications of inflation in a general-equilibrium model with real per capita output growth and staggered nominal price and wage contracts? Surprisingly, a benchmark calibration implies an optimal inflation rate of -1.9 percent. The analysis also shows that trend inflation has important effects on the economy when combined with nominal contracts and real output growth. Steady-state output and welfare losses are quantitatively important even for low values of trend inflation. Further, nominal wage contracting is found to be quantitatively more important than nominal price contracting in generating the results. This conclusion does not arise from price dispersion per se, but from an effect of nominal output growth on the optimal markup of monopolistically competitive labour suppliers. Finally, accounting for productivity growth is found to be important for calculating the welfare costs of inflation. Indeed, the presence of 2 percent productivity growth increases the welfare costs of inflation in the benchmark specification by a factor of four relative to the no-growth case.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 56 (2009)
Issue (Month): 3 (April)
Pages: 353-364

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Handle: RePEc:eee:moneco:v:56:y:2009:i:3:p:353-364

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Web page: http://www.elsevier.com/locate/inca/505566

Related research

Keywords: Optimal inflation Optimal deflation Monetary policy Nominal rigidities;

References

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Citations

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Cited by:
  1. Taisuke Nakata, 2013. "Welfare costs of shifting trend inflation," Finance and Economics Discussion Series 2013-12, Board of Governors of the Federal Reserve System (U.S.).
  2. Tesfaselassie, Mewael F., 2013. "Trend productivity growth and the government spending multiplier," Journal of Macroeconomics, Elsevier, vol. 37(C), pages 197-207.
  3. Henning Weber, 2012. "The Optimal Inflation Rate and Firm-Level Productivity Growth," Kiel Working Papers 1773, Kiel Institute for the World Economy.
  4. Quamrul Ashraf & Boris Gershman & Peter Howitt, 2011. "Banks, Market Organization, and Macroeconomic Performance: An Agent-Based Computational Analysis," Center for Development Economics 2011-06, Department of Economics, Williams College.
  5. Guido Ascari & Argia M. Sbordone, 2013. "The macroeconomics of trend inflation," Staff Reports 628, Federal Reserve Bank of New York.
  6. Olmos, Lorena & Sanso Frago, Marcos, 2014. "Monetary policy and growth with trend inflation and financial frictions," MPRA Paper 54606, University Library of Munich, Germany.
  7. Henning Weber, 2011. "Optimal inflation and firms' productivity dynamics," Kiel Working Papers 1685, Kiel Institute for the World Economy.
  8. Robert Amano & Tom Carter & Kevin Moran, 2012. "Inflation and Growth: A New Keynesian Perspective," CIRANO Working Papers 2012s-20, CIRANO.
  9. Weber, Henning, 2013. "Learning By Doing in New Firms and the Optimal Rate of Inflation," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79761, Verein für Socialpolitik / German Economic Association.
  10. Katsunori Yamada & Masayuki Sato & Yasuhiro Nakamoto, 2009. "Measurement of Social Preference from Utility-Based Choice Experiments," ISER Discussion Paper 0759, Institute of Social and Economic Research, Osaka University.

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