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

Abstract

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, in our model economy, 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 Department of Economics, Williams College in its series Department of Economics Working Papers with number 2013-12.

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Length: 34 pages
Date of creation: Aug 2011
Date of revision: Mar 2014
Publication status: Forthcoming in Macroeconomic Dynamics.
Handle: RePEc:wil:wileco:2013-12
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Keywords: Agent-based computational model; trend inflation; price dispersion; firm turnover;

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Find related papers by JEL classification:
  • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
  • E00 - Macroeconomics and Monetary Economics - - General - - - General
  • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
  • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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  1. Dosi, Giovanni & Fagiolo, Giorgio & Roventini, Andrea, 2010. "Schumpeter meeting Keynes: A policy-friendly model of endogenous growth and business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1748-1767, September.
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  6. 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.
  7. Gomme, Paul, 1993. "Money and growth revisited : Measuring the costs of inflation in an endogenous growth model," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 51-77, August.
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  11. Parks, Richard W, 1978. "Inflation and Relative Price Variability," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 79-95, February.
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  16. Lach, Saul & Tsiddon, Daniel, 1992. "The Behavior of Prices and Inflation: An Empirical Analysis of Disaggregated Price Data," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 349-89, April.
  17. Guy Debelle & Owen Lamont, 1996. "Relative Price Variability and Inflation: Evidence from US Cities," NBER Working Papers 5627, National Bureau of Economic Research, Inc.
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  19. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393.
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Cited by:

  1. Giri, Federico & Riccetti, Luca & Russo, Alberto & Gallegati, Mauro, 2016. "Monetary Policy and Large Crises in a Financial Accelerator Agent-Based Model," MPRA Paper 70371, University Library of Munich, Germany.
  2. Quamrul Ashraf & Boris Gershman & Peter Howitt, 2015. "Banks, Market Organization, and Macroeconomic Performance: An Agent-Based Computational Analysis," Working Papers 2015-10, American University, Department of Economics.
  3. Lilit Popoyan & Mauro Napoletano & Andrea Roventini, 2015. "Taming macroeconomic instability: Monetary and macro prudential policy interactions in an agent-based model," Sciences Po publications 2015-32, Sciences Po.
  4. Edoardo Gaffeo & Mauro Gallegati & Umberto Gostoli, 2012. "An agent-based "proof of principle" for Walrasian macroeconomic theory," CEEL Working Papers 1202, Cognitive and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia.
  5. Isabelle SALLE & Marc-Alexandre SENEGAS & Murat YILDIZOGLU, 2013. "How Transparent About Its Inflation Target Should a Central Bank be? An Agent-Based Model Assessment," Cahiers du GREThA 2013-24, Groupe de Recherche en Economie Théorique et Appliquée.
  6. Jing Cynthia Wu & Kinda Hachem, 2013. "Inflation Announcements and Social Dynamics," 2013 Meeting Papers 238, Society for Economic Dynamics.
  7. Ricetti, Luca & Russo, Alberto & Gallegati, Mauro, 2013. "Unemployment benefits and financial leverage in an agent based macroeconomic model," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 7, pages 1-44.
  8. Peter Howitt & Ömer Özak, 2009. "Adaptive Consumption Behavior," NBER Working Papers 15427, National Bureau of Economic Research, Inc.
  9. Richard Bookstaber, 2012. "Using Agent-Based Models for Analyzing Threats to Financial Stability," Working Papers 12-03, Office of Financial Research, US Department of the Treasury.
  10. Andrea Teglio & Andrea Mazzocchetti & Linda Ponta & Marco Raberto & Silvano Cincotti, 2015. "Budgetary rigour with stimulus in lean times: Policy advices from an agent-based model," Working Papers 2015/07, Economics Department, Universitat Jaume I, Castellón (Spain).

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