Discretionary Inflation in a General Equilibrium Model
AbstractThis 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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Bibliographic InfoPaper provided by UBC Department of Economics in its series Old UBC Departmental Papers with number 9704.
Length: 26 pages
Date of creation: Jan 1997
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Other versions of this item:
- Neiss, Katharine S, 1999. "Discretionary Inflation in a General Equilibrium Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 357-74, August.
- Neiss, K.S., 1997. "Discretionary Inflation in a General Equilibrium Model," UBC Departmental Archives 97-4, UBC Department of Economics.
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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