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Inflation, Nominal Interest Rates, and the Variability of Output

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  • Bankim Chadha
  • Daniel Tsiddon

Abstract

This paper examines the distribution of output around capacity when money demand is a nonlinear function of the nominal interest rate such that nominal interest rates cannot become negative. When fluctuations in output result primarily from disturbances to the money market, the variance of output is shown to be an increasing function of the trend inflation rate. When they result from disturbances to the goods market, the variance of output is a decreasing function of the trend inflation rate. When both disturbances are significant, there exists, in general, a critical non-zero trend inflation rate that minimizes the variance of output.

Suggested Citation

  • Bankim Chadha & Daniel Tsiddon, 1996. "Inflation, Nominal Interest Rates, and the Variability of Output," IMF Working Papers 96/109, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:96/109
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    References listed on IDEAS

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    9. Bankim Chadha & Eswar Prasad, 1993. "Interpreting the Cyclical Behavior of Prices," IMF Staff Papers, Palgrave Macmillan, vol. 40(2), pages 266-298, June.
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    Citations

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    Cited by:

    1. Takala, Kari, 1995. "The interest rate sensitivity of output in Finland," Research Discussion Papers 11/1995, Bank of Finland.
    2. Bali, Turan G. & Thurston, Thom B., 2002. "On the efficiency of monetary policy rules with flexible prices and rational expectations," Journal of Economics and Business, Elsevier, vol. 54(6), pages 615-631.
    3. Henry, Olan T. & Shields, Kalvinder, 2004. "Is there a unit root in inflation?," Journal of Macroeconomics, Elsevier, vol. 26(3), pages 481-500, September.

    More about this item

    Keywords

    Inflation; price level; money supply; rate of inflation; inflation rate;

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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