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The Output Effect Of Stopping Inflation When Velocity Is Time Varying

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Author Info

  • Lynne EVANS

    (Newcastle University Business School, UK)

  • Anamaria NICOLAE

    (Durham University Business School, UK)

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    Abstract

    This paper explores the role of time varying velocity on output responses to policies for reducing/stopping inflation. We study a dynamic general equilibrium model with sticky prices in which we introduce time varying velocity. Specifically, nonstationary velocity is endogenised in the model developed by Ireland (1997) for analysing optimal disinflation. The non-linear solution method reveals that, depending on velocity, the ‘disinflationary boom’ found by Ball (1994) may disappear and that early output losses may be much larger than previously thought. Indeed, we find that a gradual disinflation from a low inflation may even be undesirable given its overall negative impact on the economy

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    File URL: http://www.rebe.rau.ro/RePEc/rau/jisomg/SU08/JISOM-SU08-A22.pdf
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    Bibliographic Info

    Article provided by Romanian-American University in its journal Journal of Information Systems and Operation Management.

    Volume (Year): 2 (2008)
    Issue (Month): 1 (July)
    Pages: 231-253

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    Handle: RePEc:rau:jisomg:v:2:y:2008:i:1:p:231-253

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    Related research

    Keywords: price stability; velocity; disinflation; output boom; optimal speed of disinflation;

    References

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    1. Ball, L. & Mankiw, N.G., 1992. "Asymmetric Price Adjustment and Economic Fluctuations," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1602, Harvard - Institute of Economic Research.
    2. Peter N. Ireland, 1996. "Stopping inflations, big and small," Working Paper, Federal Reserve Bank of Richmond 96-01, Federal Reserve Bank of Richmond.
    3. Aubhik Khan & Robert King & Alexander L. Wolman, 2002. "Optimal monetary policy," Working Papers, Federal Reserve Bank of Philadelphia 02-19, Federal Reserve Bank of Philadelphia.
    4. Laurence Ball, 1990. "Credible Disinflation with Staggered Price Setting," NBER Working Papers, National Bureau of Economic Research, Inc 3555, National Bureau of Economic Research, Inc.
    5. Burstein, Ariel T., 2006. "Inflation and output dynamics with state-dependent pricing decisions," Journal of Monetary Economics, Elsevier, Elsevier, vol. 53(7), pages 1235-1257, October.
    6. Mehra, Rajnish & Prescott, Edward C., 1988. "The equity risk premium: A solution?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 22(1), pages 133-136, July.
    7. Hodrick, Robert J & Kocherlakota, Narayana R & Lucas, Deborah, 1991. "The Variability of Velocity in Cash-in-Advance Models," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(2), pages 358-84, April.
    8. Rotemberg, Julio J & Woodford, Michael, 1992. "Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(6), pages 1153-1207, December.
    9. Anamaria Nicolae & Charles Nolan, 2004. "The Impact of Imperfect Credibility in a Transition to Price Stability," CDMA Working Paper Series, Centre for Dynamic Macroeconomic Analysis 200402, Centre for Dynamic Macroeconomic Analysis.
    10. Wang, Weimin & Shi, Shouyong, 2006. "The variability of velocity of money in a search model," Journal of Monetary Economics, Elsevier, Elsevier, vol. 53(3), pages 537-571, April.
    11. Ireland, Peter N, 1995. "Endogenous Financial Innovation and the Demand for Money," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 27(1), pages 107-23, February.
    12. Basu, Parantap & Dua, Pami, 1996. "The behavior of velocity and nominal interest rates in a cash-in-advance model," Journal of Macroeconomics, Elsevier, Elsevier, vol. 18(3), pages 463-478.
    13. Friedman, Benjamin M & Kuttner, Kenneth N, 1992. "Money, Income, Prices, and Interest Rates," American Economic Review, American Economic Association, American Economic Association, vol. 82(3), pages 472-92, June.
    14. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 15(2), pages 145-161, March.
    15. Gould, John P & Nelson, Charles R, 1974. "The Stochastic Structure of the Velocity of Money," American Economic Review, American Economic Association, American Economic Association, vol. 64(3), pages 405-18, June.
    16. Mehra, Rajnish, 1988. "On the Existence and Representation of Equilibrium in an Economy with Growth and Nonstationary Consumption," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(1), pages 131-35, February.
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