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The Output Effect Of Stopping Inflation When Velocity Is Time Varying

Author Info

Listed author(s):
  • Lynne EVANS

    (Newcastle University Business School, UK)

  • Anamaria NICOLAE

    (Durham University Business School, UK)

Registered author(s):

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

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    1. 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, vol. 99(2), pages 358-384, April.
    2. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    3. Ireland, Peter N, 1995. "Endogenous Financial Innovation and the Demand for Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 107-123, February.
    4. Aubhik Khan & Robert G. King & Alexander L. Wolman, 2003. "Optimal Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 825-860.
    5. Ball, Laurence & Mankiw, N Gregory, 1994. "Asymmetric Price Adjustment and Economic Fluctuations," Economic Journal, Royal Economic Society, vol. 104(423), pages 247-261, March.
    6. Nicolae, Anamaria & Nolan, Charles, 2006. "The Impact of Imperfect Credibility in a Transition to Price Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 47-66, February.
    7. 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, vol. 29(1), pages 131-135, February.
    8. Ball, Laurence, 1994. "Credible Disinflation with Staggered Price-Setting," American Economic Review, American Economic Association, vol. 84(1), pages 282-289, March.
    9. Burstein, Ariel T., 2006. "Inflation and output dynamics with state-dependent pricing decisions," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1235-1257, October.
    10. Peter N. Ireland, 1997. "Stopping inflations, big and small," Proceedings, Federal Reserve Bank of Cleveland, pages 759-782.
    11. Basu, Parantap & Dua, Pami, 1996. "The behavior of velocity and nominal interest rates in a cash-in-advance model," Journal of Macroeconomics, Elsevier, vol. 18(3), pages 463-478.
    12. Wang, Weimin & Shi, Shouyong, 2006. "The variability of velocity of money in a search model," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 537-571, April.
    13. Gould, John P & Nelson, Charles R, 1974. "The Stochastic Structure of the Velocity of Money," American Economic Review, American Economic Association, vol. 64(3), pages 405-418, June.
    14. Mehra, Rajnish & Prescott, Edward C., 1988. "The equity risk premium: A solution?," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 133-136, July.
    15. Kevin B. Grier, 2001. "Money," Chapters, in: The Elgar Companion to Public Choice, chapter 14 Edward Elgar Publishing.
    16. 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, vol. 100(6), pages 1153-1207, December.
    17. Friedman, Benjamin M & Kuttner, Kenneth N, 1992. "Money, Income, Prices, and Interest Rates," American Economic Review, American Economic Association, vol. 82(3), pages 472-492, June.
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