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The implications of inflation in an estimated New-Keynesian model

  • Pablo A. Guerron-Quintana

This paper studies the steady state and dynamic consequences of inflation in an estimated dynamic stochastic general equilibrium model of the U.S. economy. It is found that 10 percentage points of inflation entails a steady state welfare cost as high as 13 percent of annual consumption. This large cost is mainly driven by staggered price contracts and price indexation. The transition from high to low inflation inflicts a welfare loss equivalent to 0.53 percent. The role of nominal/real frictions as well as that of parameter uncertainty is also addressed.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 10-2.

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Date of creation: 2010
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Handle: RePEc:fip:fedpwp:10-2
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