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How Inflation Affects Macroeconomic Performance: An Agent-Based Computational Investigation

  • Quamrul Ashraf
  • Boris Gershman
  • Peter Howitt

We use an agent-based computational approach to show how inflation can worsen macroeconomic performance by disrupting the mechanism of exchange in a decentralized market economy. We find that increasing the trend rate of inflation above 3 percent has a substantial deleterious effect, but lowering it below 3 percent has no significant macroeconomic consequences. Our finding remains qualitatively robust to changes in parameter values and to modifications to our model that partly address the Lucas critique. Finally, we contribute a novel explanation for why cross-country regressions may fail to detect a significant negative effect of trend inflation on output even when such an effect exists in reality.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18225.

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Date of creation: Jul 2012
Date of revision:
Handle: RePEc:nbr:nberwo:18225
Note: EFG ME
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  1. Quamrul Ashraf & Boris Gershman & Peter Howitt, 2011. "Banks, Market Organization, and Macroeconomic Performance: An Agent-Based Computational Analysis," Center for Development Economics 2011-06, Department of Economics, Williams College.
  2. Guillaume Rocheteau & Randall Wright, 2003. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," PIER Working Paper Archive 03-031, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
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  19. Joseph H. Haslag, 1997. "Output, growth, welfare, and inflation: a survey," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q II, pages 11-21.
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