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Welfare costs of shifting trend inflation

  • Taisuke Nakata

This paper studies the welfare consequences of exogenous variations in trend inflation in a New Keynesian economy. Consumption and leisure respond asymmetrically to a rise and a decline in trend inflation. As a result, an increase in the variance of shocks to the trend inflation process decreases welfare not only by increasing the volatilities of consumption and leisure, but also by decreasing their average levels. I find that the welfare cost of drifting trend inflation is modest and that it comes mainly from reduced average levels of consumption and leisure, not from their increased volatilities.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2013-12.

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Date of creation: 2013
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Handle: RePEc:fip:fedgfe:2013-12
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  1. Yuriy Gorodnichenko & Olivier Coibion, 2009. "Monetary Policy, Trend Inflation and the Great Moderation: An Alternative Interpretation," 2009 Meeting Papers 21, Society for Economic Dynamics.
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  13. repec:fip:fedgsq:y:2006:i:june15 is not listed on IDEAS
  14. Michael T. Kiley, 2007. "Is Moderate-to-High Inflation Inherently Unstable?," International Journal of Central Banking, International Journal of Central Banking, vol. 3(2), pages 173-201, June.
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  23. Ascari, Guido, 2003. "Staggered prices and trend inflation: some nuisances," Research Discussion Papers 27/2003, Bank of Finland.
  24. Kozicki, Sharon & Tinsley, P. A., 2001. "Shifting endpoints in the term structure of interest rates," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 613-652, June.
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