HOW INFLATION AFFECTS MACROECONOMIC PERFORMANCE: AN AGENT-BASED COMPUTATIONAL INVESTIGATION. (10th October 2014)

• Record Type: Journal Article
• Authors: Ashraf, Quamrul; Gershman, Boris; Howitt, Peter
• Editors: Serletis, Apostolos
• Is Part Of: Macroeconomic dynamics. Volume 20:Number 2(2016:Apr.)
• Page Start: 558
• Page End: 581
• Publication Date: 2014-10-10
• Subjects: Agent-Based Computational Model, -- Inflation, -- Price Dispersion, -- Firm Turnover; Macroeconomics -- Periodicals; 339.05
• DOI: 10.1017/S1365100514000303
• Languages: English
• ISSNs: 1365-1005

Abstract

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% has a substantial deleterious effect, but lowering it below 3% 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.