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2013-10 How inflation affects macroeconomic performance

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posted on 2023-08-05, 10:38 authored by Quamrul H. Ashraf, Boris GershmanBoris 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, 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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American University

Notes

Working Papers 2013-10

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http://hdl.handle.net/1961/auislandora:70527

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