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Inflation and the great ratios: long-term evidence from the U.S

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Listed author(s):
  • Shaghil Ahmed
  • John H. Rogers

Abstract

Using over 100 years of U.S. data, we find that the long-run effects of inflation on consumption, investment, and output are positive. Thus, models generating long-term negative effects of inflation on output and consumption (including endogenous growth and RBC models with money) seem to be at odds with data from the moderate inflation rate environment we consider. Also, great ratios like the consumption and investment rates are not independent of inflation, which we interpret in terms of the Fisher effect. However, in the full sample, the variability of the stochastic inflation trend is small relative to the variability of the productivity and fiscal trends, so inflation accounts for little of the movements in real variables. By comparison, we find in the post-WWII sub-period that although significant "permanent" shocks to inflation are a more regular feature of the data, the long-run real effects of a given size inflation shock are much smaller.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 628.

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Date of creation: 1998
Handle: RePEc:fip:fedgif:628
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Keywords: Inflation (Finance);

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