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The Macroeconomic Effects of Non-Zero Trend Inflation

Author

Listed:
  • Robert Amano
  • Steve Ambler
  • Nooman Rebei

Abstract

The authors study the macroeconomic effects of non-zero trend inflation in a simple dynamic stochastic general-equilibrium model with sticky prices. They show that trend inflation leads to a substantial reduction in the stochastic means of output, consumption, and employment. It also leads to an increase in the variability and persistence of most aggregates. Price dispersion across firms unambiguously increases the welfare costs of inflation. The effects hold qualitatively no matter how sticky prices are modelled, but they are quantitatively much stronger under Calvo pricing.

Suggested Citation

  • Robert Amano & Steve Ambler & Nooman Rebei, 2006. "The Macroeconomic Effects of Non-Zero Trend Inflation," Staff Working Papers 06-34, Bank of Canada.
    • Handle: RePEc:bca:bocawp:06-34
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Business fluctuations and cycles; Economic models; Inflation and prices; Inflation targets;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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