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How Inflation Affects Macroeconomic Performance: An Agent-Based Computational Investigation

  • Quamrul Ashraf
  • Boris Gershman
  • Peter Howitt

We use an agent-based computational approach to show how inflation can worsen macroeconomic performance by disrupting the mechanism of exchange in a decentralized market economy. We find that, in our model economy, increasing the trend rate of inflation above 3 percent has a substantial deleterious effect, but lowering it below 3 percent has no significant macroeconomic consequences. Our finding remains qualitatively robust to changes in parameter values and to modifications to our model that partly address the Lucas critique. Finally, we contribute a novel explanation for why cross-country regressions may fail to detect a significant negative effect of trend inflation on output even when such an effect exists in reality.

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File URL: http://www.american.edu/cas/economics/research/upload/2013-10.pdf
File Function: First version, 2013
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Paper provided by American University, Department of Economics in its series Working Papers with number 2013-10.

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Date of creation: 2013
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Handle: RePEc:amu:wpaper:2013-10
Contact details of provider: Web page: http://www.american.edu/cas/economics/

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  1. Guillaume Rocheteau & Randall Wright, 2004. "Money in search equilibrium, in competitive equilibrium, and in competitive search equilibrium," Working Paper 0405, Federal Reserve Bank of Cleveland.
  2. David Laidler, 1997. "Money and Macroeconomics," Books, Edward Elgar, number 1252, December.
  3. Paul Gomme, 1991. "Money and growth revisited," Discussion Paper / Institute for Empirical Macroeconomics 55, Federal Reserve Bank of Minneapolis.
  4. Mikhail Golosov & Robert E. Lucas Jr., 2007. "Menu Costs and Phillips Curves," Journal of Political Economy, University of Chicago Press, vol. 115, pages 171-199.
  5. Allen Head & Alok Kumar, 2004. "Price Dispersion, Inflation and Welfare," NajEcon Working Paper Reviews 122247000000000241, www.najecon.org.
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  8. Guido Ascari, 2004. "Staggered Prices and Trend Inflation: Some Nuisances," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(3), pages 642-667, July.
  9. Guy Debelle & Owen Lamont, 1996. "Relative Price Variability and Inflation: Evidence from US Cities," NBER Working Papers 5627, National Bureau of Economic Research, Inc.
  10. Christophe Deissenberg & Sander Van Der Hoog & Herbert Dawid, 2008. "EURACE: A Massively Parallel Agent-Based Model of the European Economy," Working Papers halshs-00339756, HAL.
  11. Peter Howitt, 2006. "The Microfoundations of the Keynesian Multiplier Process," Journal of Economic Interaction and Coordination, Springer, vol. 1(1), pages 33-44, May.
  12. Quamrul Ashraf & Boris Gershman & Peter Howitt, 2011. "Banks, Market Organization, and Macroeconomic Performance: An Agent-Based Computational Analysis," NBER Working Papers 17102, National Bureau of Economic Research, Inc.
  13. Bullard, James & Keating, John W., 1995. "The long-run relationship between inflation and output in postwar economies," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 477-496, December.
  14. Mark Bils & Peter J. Klenow, 2002. "Some Evidence on the Importance of Sticky Prices," NBER Working Papers 9069, National Bureau of Economic Research, Inc.
  15. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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  17. Parks, Richard W, 1978. "Inflation and Relative Price Variability," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 79-95, February.
  18. Gomme, P., 1993. "Money and Growth Revisited : Measuring the Costs of Inflation in an Endogenous Growth Model," Discussion Papers dp93-03, Department of Economics, Simon Fraser University.
  19. Parsley, David C, 1996. "Inflation and Relative Price Variability in the Short and Long Run: New Evidence from the United States," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(3), pages 323-41, August.
  20. Pierre Fortin, 1996. "The Great Canadian Slump," Canadian Journal of Economics, Canadian Economics Association, vol. 29(4), pages 761-87, November.
  21. Ragan, Christopher, 1998. "On the Believable Benefits of Low Inflation," Working Papers 98-15, Bank of Canada.
  22. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393.
  23. Lach, Saul & Tsiddon, Daniel, 1992. "The Behavior of Prices and Inflation: An Empirical Analysis of Disaggregated Price Data," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 349-89, April.
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