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Published online by Cambridge University Press:  10 October 2014

Quamrul Ashraf
Williams College
Boris Gershman
American University
Peter Howitt*
Brown University and NBER
Address correspondence to: Peter Howitt, Department of Economics, Brown University, 64 Waterman Street, Providence, RI 02912, USA; e-mail:


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.

Copyright © Cambridge University Press 2014 

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