IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

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

Author Info

Listed author(s):

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.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://web.williams.edu/Economics/wp/AshrafGershmanHowitt_Inflation.pdf
File Function: Full text
Download Restriction: no

Paper provided by Department of Economics, Williams College in its series Department of Economics Working Papers with number 2013-12.

as
in new window

Length: 34 pages
Date of creation: Aug 2011
Date of revision: Mar 2014
Publication status: Published in Macroeconomic Dynamics, March 2016, 20(S2), pp. 558-581.
Handle: RePEc:wil:wileco:2013-12
Contact details of provider: Postal:
Williamstown, MA 01267

Phone: 413 597 2476
Fax: 413 597 4045
Web page: http://econ.williams.edu
Email:


More information through EDIRC

Order Information: Email:


Keywords: Agent-based computational model; trend inflation; price dispersion; firm turnover;

Other versions of this item:

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

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as
in new window


  1. 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.
  2. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
  3. Mikhail Golosov & Robert E. Lucas Jr., 2007. "Menu Costs and Phillips Curves," Journal of Political Economy, University of Chicago Press, vol. 115, pages 171-199.
  4. Parks, Richard W, 1978. "Inflation and Relative Price Variability," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 79-95, February.
  5. Ashraf, Quamrul & Gershman, Boris & Howitt, Peter, 2017. "Banks, market organization, and macroeconomic performance: An agent-based computational analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 135(C), pages 143-180.
  6. Allen Head & Alok Kumar, 2005. "Price Dispersion, Inflation, And Welfare," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 533-572, 05.
  7. Guillaume Rocheteau & Randall Wright, 2005. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," Econometrica, Econometric Society, vol. 73(1), pages 175-202, 01.
  8. Guido Ascari, 2004. "Staggered Prices and Trend Inflation: Some Nuisances," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(3), pages 642-667, July.
  9. Peter Howitt, 2006. "The Microfoundations of the Keynesian Multiplier Process," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 1(1), pages 33-44, May.
  10. Christophe Deissenberg & Sander Van Der Hoog & Herbert Dawid, 2008. "EURACE: A Massively Parallel Agent-Based Model of the European Economy," Working Papers halshs-00339756, HAL.
  11. 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.
  12. Debelle, Guy & Lamont, Owen, 1997. "Relative Price Variability and Inflation: Evidence from U.S. Cities," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 132-152, February.
  13. 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.
  14. Tack Yun, 2005. "Optimal Monetary Policy with Relative Price Distortions," American Economic Review, American Economic Association, vol. 95(1), pages 89-109, March.
  15. Ragan, Christopher, 1998. "On the Believable Benefits of Low Inflation," Staff Working Papers 98-15, Bank of Canada.
  16. David Laidler, 1997. "Money and Macroeconomics," Books, Edward Elgar Publishing, number 1252, July.
  17. Parsley, David C, 1996. "Inflation and Relative Price Variability in the Short and Long Run: New Evidence from the United States," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(3), pages 323-341, August.
  18. 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 349-389, April.
  19. Bullard, James & Keating, John W., 1995. "The long-run relationship between inflation and output in postwar economies," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 477-496, December.
  20. Pierre Fortin, 1996. "The Great Canadian Slump," Canadian Journal of Economics, Canadian Economics Association, vol. 29(4), pages 761-787, November.
  21. 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.
  22. 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.
  23. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
Full references (including those not matched with items on IDEAS)

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

as
in new window


Cited by:

  1. 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.
  2. Popoyan, Lilit & Napoletano, Mauro & Roventini, Andrea, 2017. "Taming macroeconomic instability: Monetary and macro-prudential policy interactions in an agent-based model," Journal of Economic Behavior & Organization, Elsevier, vol. 134(C), pages 117-140.
  3. 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.
  4. 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.
  5. Giri, Federico & Riccetti, Luca & Russo, Alberto & Gallegati, Mauro, 2016. "Monetary policy and large crises in a financial accelerator agent-based model," FinMaP-Working Papers 65, Collaborative EU Project FinMaP - Financial Distortions and Macroeconomic Performance: Expectations, Constraints and Interaction of Agents.
  6. Dawid, H. & Harting, P. & Neugart, M., 2014. "Economic convergence: Policy implications from a heterogeneous agent model," Journal of Economic Dynamics and Control, Elsevier, vol. 44(C), pages 54-80.
  7. 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.
  8. Howitt, Peter & Özak, Ömer, 2014. "Adaptive consumption behavior," Journal of Economic Dynamics and Control, Elsevier, vol. 39(C), pages 37-61.
  9. Ashraf, Quamrul & Gershman, Boris & Howitt, Peter, 2017. "Banks, market organization, and macroeconomic performance: An agent-based computational analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 135(C), pages 143-180.
  10. Jing Cynthia Wu & Kinda Hachem, 2013. "Inflation Announcements and Social Dynamics," 2013 Meeting Papers 238, Society for Economic Dynamics.
  11. 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).

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Access and download statistics

When requesting a correction, please mention this item's handle: RePEc:wil:wileco:2013-12. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Stephen Sheppard)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.