Learning, Inflation Cycles, and Depression
This paper constructs a model that describes inflation cycles and prolonged depression as generated by the learning behavior of households who face a random liquidity shock in which money is needed. Households update the subjective probability of the shock based on the observation and change their liquidity preference accordingly. In this setting, we first derive a stationary cycles under perfect price adjustment, which is characterized by periods of gradual inflation and sudden sporadic falls of the price level. When the nominal stickiness is introduced, the liquidity shock is followed by a period of depression in which unemployment exists and deflation occurs gradually. Depression is deep and prolonged when the economy has experienced a long period of boom before encountering a liquidity shock.
|Date of creation:||May 2006|
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- Keith Sill & Jeff Wrase, 2000.
"Exchange Rates, Monetary Policy Regimes, and Beliefs,"
Econometric Society World Congress 2000 Contributed Papers
1701, Econometric Society.
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"A Nonlinear Model of the Business Cycle,"
Econometric Society 2004 North American Winter Meetings
490, Econometric Society.
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"Monetary policy regimes and beliefs,"
9905, Federal Reserve Bank of Cleveland.
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- David Andolfatto & Paul Gomme, 1997. "Monetary Policy Regimes and Beliefs," Working Papers 97002, University of Waterloo, Department of Economics, revised Jan 1997.
- David Andolfatto & Paul Gomme, 1997. "Monetary Policy Regimes and Beliefs," Cahiers de recherche CREFE / CREFE Working Papers 48, CREFE, Université du Québec à Montréal, revised Apr 2001.
- Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
- Lee, I.H. & Chalkley, M., 1994. "Asymmetric business cycles," Discussion Paper Series In Economics And Econometrics 9411, Economics Division, School of Social Sciences, University of Southampton.
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