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The Macroeconomic Effects of Nonzero Trend Inflation

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  • ROBERT AMANO
  • STEVE AMBLER
  • NOOMAN REBEI

Abstract

We study the macroeconomic effects of nonzero trend inflation in a simple dynamic stochastic general equilibrium model under three common time-dependent pricing schemes: Calvo, truncated-Calvo, and Taylor. We show that, regardless of the pricing mechanism, trend inflation leads to a reduction in the stochastic means of output, consumption and employment, and an increase in the stochastic mean of inflation beyond its deterministic steady-state level. The variability of most aggregates also increases. These effects are quantitatively much stronger with Calvo pricing. Copyright 2007 The Ohio State University.

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Bibliographic Info

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

Volume (Year): 39 (2007)
Issue (Month): 7 (October)
Pages: 1821-1838

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Handle: RePEc:mcb:jmoncb:v:39:y:2007:i:7:p:1821-1838

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

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  1. Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Solving Dynamic General Equilibrium Models Using a Second-Order Approximation to the Policy Function," NBER Technical Working Papers 0282, National Bureau of Economic Research, Inc.
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  3. Peter N. Ireland, 2007. "Changes in the Federal Reserve's Inflation Target: Causes and Consequences," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(8), pages 1851-1882, December.
  4. Alexander L. Wolman, 2001. "A primer on optimal monetary policy with staggered price-setting," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 27-52.
  5. Stephanie Schmitt-Grohe & Martin Uribe, 2005. "Optimal Fiscal and Monetary Policy in a Medium-Scale Macroeconomic Model: Expanded Version," NBER Working Papers 11417, National Bureau of Economic Research, Inc.
  6. Andrew T. Levin & Jeremy M. Piger, 2003. "Is inflation persistence intrinsic in industrial economies?," Working Papers 2002-023, Federal Reserve Bank of St. Louis.
  7. Peter J. Klenow & Oleksiy Kryvtsov, 2007. "State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation?," Discussion Papers 07-007, Stanford Institute for Economic Policy Research.
  8. Andrew T. Levin & Fabio M. Natalucci & Jeremy M. Piger, 2004. "The macroeconomic effects of inflation targeting," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 51-80.
  9. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April.
  10. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  11. Frédérick Demers, 2003. "The Canadian Phillips Curve and Regime Shifting," Working Papers 03-32, Bank of Canada.
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Cited by:
  1. Sergio A. Lago Alves, 2013. "Is the Divine Coincidence Just a Coincidence? The Implications of Trend Inflation," Working Papers Series 329, Central Bank of Brazil, Research Department.
  2. Guido Ascari & Tiziano Ropele, 2009. "Trend Inflation, Taylor Principle and Indeterminacy," Quaderni di Dipartimento 097, University of Pavia, Department of Economics and Quantitative Methods.
  3. Olmos, Lorena & Sanso Frago, Marcos, 2014. "Monetary policy and growth with trend inflation and financial frictions," MPRA Paper 54606, University Library of Munich, Germany.
  4. Mohammad Ali Kafaie & Amir Mohammad Moshref, 2013. "Inflation and Relative Price Dispersion: Evidence for Iran," Iranian Economic Review, Economics faculty of Tehran university, vol. 18(1), pages 93-104, winter.
  5. Ahrens, Steffen & Snower, Dennis J., 2012. "Envy, guilt, and the Phillips curve," Economics Working Papers 2012-01, Christian-Albrechts-University of Kiel, Department of Economics.
  6. 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.).
  7. Daniel de Munnik & Kuan Xu, 2007. "Micro Foundations of Price-Setting Behaviour: Evidence from Canadian Firms," Working Papers 07-31, Bank of Canada.
  8. Guido Ascari & Argia M. Sbordone, 2013. "The macroeconomics of trend inflation," Staff Reports 628, Federal Reserve Bank of New York.
  9. Sergio A. Lago Alves, 2012. "Optimal Policy When the Inflation Target is not Optimal," Working Papers Series 271, Central Bank of Brazil, Research Department.
  10. Hakan, Yilmazkuday, 2009. "Is there a Role for International Trade Costs in Explaining the Central Bank Behavior?," MPRA Paper 15951, University Library of Munich, Germany.

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