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Self-Organization of Inflation Volatility

Author

Listed:
  • Makoto Nirei

    (University of Tokyo)

  • Jose Scheinkman

    (Columbia University)

Abstract

We present a state-dependent pricing model that generates inflation fluctuations from idiosyncratic shocks on firms. A firm's nominal price increase lowers the other firms' relative prices, thereby inducing those firms' nominal price increases. This snow-ball effect of repricing causes the fluctuations of aggregate price without exogenous aggregate shocks. The fluctuations caused by this mechanism are more volatile when the density of firms at repricing threshold is high, and the density at the threshold is high when the trend inflation level is high. Thus, the model implies that the higher trend inflation causes the larger volatility of short-term inflation rates. Analytical and numerical analyses show that the model can account for the positive relationship between inflation level and volatility that has been observed empirically.

Suggested Citation

  • Makoto Nirei & Jose Scheinkman, 2019. "Self-Organization of Inflation Volatility," 2019 Meeting Papers 1451, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:1451
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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