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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. 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.
  2. 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.
  3. Andrew Levin & Jeremy Piger, 2003. "Is Inflation Persistence Intrinsic in Industrial Economies?," Computing in Economics and Finance 2003 298, Society for Computational Economics.
  4. 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.
  5. repec:nbr:nberre:0126 is not listed on IDEAS
  6. Peter J. Klenow & Oleksiy Kryvtsov, 2008. "State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation?," The Quarterly Journal of Economics, MIT Press, vol. 123(3), pages 863-904, August.
  7. Schmitt-Grohe, Stephanie & Uribe, Martin, 2004. "Solving dynamic general equilibrium models using a second-order approximation to the policy function," Journal of Economic Dynamics and Control, Elsevier, vol. 28(4), pages 755-775, January.
  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. Frédérick Demers, 2003. "The Canadian Phillips Curve and Regime Shifting," Working Papers 03-32, Bank of Canada.
  10. 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.
  11. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
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Cited by:
  1. Guido Ascari & Tiziano Ropele, 2009. "Trend Inflation, Taylor Principle, and Indeterminacy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(8), pages 1557-1584, December.
  2. Ahrens, Steffen & Snower, Dennis J., 2014. "Envy, guilt, and the Phillips curve," Journal of Economic Behavior & Organization, Elsevier, vol. 99(C), pages 69-84.
  3. Guido Ascari & Argia M. Sbordone, 2013. "The macroeconomics of trend inflation," Staff Reports 628, Federal Reserve Bank of New York.
  4. Sergio A. Lago Alves, 2012. "Optimal Policy When the Inflation Target is not Optimal," Working Papers Series 271, Central Bank of Brazil, Research Department.
  5. Daniel de Munnik & Kuan Xu, 2007. "Micro Foundations of Price-Setting Behaviour: Evidence from Canadian Firms," Working Papers 07-31, Bank of Canada.
  6. 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.
  7. 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.
  8. 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.).
  9. 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.
  10. Olmos, Lorena & Sanso Frago, Marcos, 2014. "Monetary policy and growth with trend inflation and financial frictions," MPRA Paper 54606, University Library of Munich, Germany.

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