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Discretionary Inflation in a General Equilibrium Model

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Author Info
Neiss, Katharine S
Abstract

This paper extends the Barro and Gordon (1983) model to a general equilibrium framework in which the costs and benefits to surprise inflation reflect the preferences, technology, and market structure of the economy. The benefit of such an approach is that we can relate the underlying features of the economy to the size of the inflation bias. In particular, it can be shown that an increase in the source of the monetary authority's incentive to inflate does not necessarily result in a worsened inflation bias due to offsetting changes in the cost of inflation. Furthermore, changes in the real interest rate affect the monetary authority's incentives and hence the discretionary level of inflation. Lastly, we can show that an increase in the labor share of national income worsens the inflation bias. The model also indicates the importance of a nominal rigidity, lack of policy precommitment, and a distortion for optimal monetary policy to be characterized by a level of discretionary inflation that exceeds the Friedman (1969) rule.

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Publisher Info
Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 31 (1999)
Issue (Month): 3 (August)
Pages: 357-74
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Handle: RePEc:mcb:jmoncb:v:31:y:1999:i:3:p:357-74

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Giovanni Lombardo, . "Sticky Prices, Markup and the Business Cycle: Some Evidence," Discussion Papers 01/06, Department of Economics, University of York. [Downloadable!]
  2. Di Bartolomeo Giovanni & Acocella Nicola & Tirelli Patrizio, 2008. "Trend inflation as a workers disciplining device in a general equilibrium model," wp.comunite 0043, Department of Communication, University of Teramo. [Downloadable!]
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  3. Dudley Cooke, 2006. "Openness and Inflation," Economics Discussion Papers 621, University of Essex, Department of Economics. [Downloadable!]
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  4. David M. Arseneau, 2004. "Expectation traps in a New Keynesian open economy model," Finance and Economics Discussion Series 2004-45, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  5. Gustavo Piga, 2005. "On the Sources of the Inflation Bias and Output Variability," CEIS Research Paper 66, Tor Vergata University, CEIS. [Downloadable!]
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  6. Francesco Lippi, 2003. "Strategic Monetary Policy with Non-Atomistic Wage Setters," CEIS Research Paper 17, Tor Vergata University, CEIS. [Downloadable!]
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  7. Cuciniello Vincenzo, 2008. "The effects of macroeconomic institutions on economic performance in a general equilibrium model," wp.comunite 0036, Department of Communication, University of Teramo. [Downloadable!]
  8. Patricia Bonini, 2004. "New Macroeconomics and Credibility Analysis," Economia, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics], vol. 5(2), pages 341-359. [Downloadable!]
  9. Mark A. Wynne & Erasmus K. Kersting, 2007. "Openness and inflation," Staff Papers, Federal Reserve Bank of Dallas, issue Apr. [Downloadable!]
  10. Stefania Albanesi & V. V. Chari & Lawrence J. Christiano, 2003. "Expectation traps and monetary policy," Staff Report 319, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  11. Lombardo, Giovanni, 2004. "Inflation targeting rules and welfare in an asymmetric currency area," Discussion Paper Series 1: Economic Studies 2004,04, Deutsche Bundesbank, Research Centre. [Downloadable!]
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