Hostname: page-component-848d4c4894-nmvwc Total loading time: 0 Render date: 2024-06-16T17:28:49.015Z Has data issue: false hasContentIssue false

HOW INFLATION AFFECTS MACROECONOMIC PERFORMANCE: AN AGENT-BASED COMPUTATIONAL INVESTIGATION

Published online by Cambridge University Press:  10 October 2014

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

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.

Type
Articles
Copyright
Copyright © Cambridge University Press 2014 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Akerlof, George A., Dickens, William T., and Perry, George L. (1996) The macroeconomics of low inflation. Brookings Papers on Economic Activity 1, 176.CrossRefGoogle Scholar
Ascari, Guido (2004) Staggered prices and trend inflation: Some nuisances. Review of Economic Dynamics 7 (3), 642667.CrossRefGoogle Scholar
Ashraf, Quamrul, Gershman, Boris, and Howitt, Peter (2011) Banks, Market Organization, and Macro-economic Performance: An Agent-Based Computational Analysis. NBER working paper 17102.Google Scholar
Benabou, Roland (1992) Inflation and efficiency in search markets. Review of Economic Studies 59 (2), 299329.CrossRefGoogle Scholar
Bils, Mark and Klenow, Peter J. (2004) Some evidence on the importance of sticky prices. Journal of Political Economy 112 (5), 947985.CrossRefGoogle Scholar
Blinder, Alan S., Canetti, Elie R.D., Lebow, David E., and Rudd, Jeremy B. (1998) Asking about Prices: A New Approach to Understanding Price Stickiness. New York: Russell Sage Foundation.Google Scholar
Bullard, James and Keating, John W. (1995) The long-run relationship between inflation and output in postwar economies. Journal of Monetary Economics 36 (3), 477496.CrossRefGoogle Scholar
Calvo, Guillermo A. (1983) Staggered prices in a utility-maximizing framework. Journal of Monetary Economics 12 (3), 383398.CrossRefGoogle Scholar
Chari, V.V., Jones, Larry E., and Manuelli, Rodolfo E. (1995) The growth effects of monetary policy. Federal Reserve Bank of Minneapolis Quarterly Review 19 (4), 1832.Google Scholar
Cooley, Thomas F. and Hansen, Gary D. (1989) The inflation tax in a real business cycle model. American Economic Review 79 (4), 733748.Google Scholar
Debelle, Guy and Lamont, Owen (1997) Relative price variability and inflation: Evidence from U.S. cities. Journal of Political Economy 105 (1), 132152.CrossRefGoogle Scholar
Deissenberg, Christophe, van der Hoog, Sander, and Dawid, Herbert (2008) EURACE: A massively parallel agent-based model of the European economy. Applied Mathematics and Computation 204 (2), 541552.CrossRefGoogle Scholar
Delli Gatti, Domenico, Gaffeo, Edoardo, Gallegati, Mauro, Giulioni, Gianfranco, and Palestrini, Antonio (2008) Emergent Macroeconomics: An Agent-Based Approach to Business Fluctuations. Milan, Italy: Springer-Verlag Italia.Google Scholar
Dosi, Giovanni, Fagiolo, Giorgio, and Roventini, Andrea (2010) Schumpeter meeting Keynes: A policy-friendly model of endogenous growth and business cycles. Journal of Economic Dynamics and Control 34 (9), 17481767.CrossRefGoogle Scholar
Feldstein, Martin (1999) Capital income taxes and the benefit of price stability. In Feldstein, Martin (ed.), The Costs and Benefits of Price Stability, pp. 946. Chicago: University of Chicago Press.CrossRefGoogle Scholar
Fortin, Pierre (1996) The great Canadian slump. Canadian Journal of Economics 29 (4), 761787.CrossRefGoogle Scholar
Golosov, Mikhail and Lucas, Robert E., Jr. (2007) Menu costs and Phillips curves. Journal of Political Economy 115 (2), 171199.CrossRefGoogle Scholar
Gomme, Paul (1993) Money and growth revisited: Measuring the costs of inflation in an endogenous growth model. Journal of Monetary Economics 32 (1), 5177.CrossRefGoogle Scholar
Head, Allen and Kumar, Alok (2005) Price dispersion, inflation, and welfare. International Economic Review 46 (2), 533572.CrossRefGoogle Scholar
Heymann, Daniel and Leijonhufvud, Axel (1995) High Inflation: The Arne Ryde Memorial Lectures. New York: Clarendon Press.CrossRefGoogle Scholar
Howitt, Peter (1990) Zero inflation as a long-run target for monetary policy. In Lipsey, Richard G. (ed.), Zero Inflation: The Goal of Price Stability, pp. 66108. Toronto, Canada: C.D. Howe Institute.Google Scholar
Howitt, Peter (2006) The microfoundations of the Keynesian multiplier process. Journal of Economic Interaction and Coordination 1 (1), 3344.CrossRefGoogle Scholar
Howitt, Peter and Milionis, Petros (2007) On the Robustness of the Calvo Price-Setting Model. Mimeo, Brown University.Google Scholar
Lach, Saul and Tsiddon, Daniel (1992) The behavior of prices and inflation: An empirical analysis of disaggregated price data. Journal of Political Economy 100 (2), 349389.CrossRefGoogle Scholar
Lagos, Ricardo and Rocheteau, Guillaume (2005) Inflation, output, and welfare. International Economic Review 46 (2), 495522.CrossRefGoogle Scholar
Lastrapes, William D. (2006) Inflation and the distribution of relative prices: The role of productivity and money supply shocks. Journal of Money, Credit and Banking 38 (8), 21592198.CrossRefGoogle Scholar
Leijonhufvud, Axel (1977) Costs and consequences of inflation. In Harcourt, G.C. (ed.), The Micro-economic Foundations of Macroeconomics, pp. 265312. London: Macmillan Press.CrossRefGoogle Scholar
Levine, Ross and Zervos, Sara J. (1993) What we have learned about policy and growth from cross-country regressions? American Economic Review Papers and Proceedings 83 (2), 426430.Google Scholar
Parks, Richard W. (1978) Inflation and relative price variability. Journal of Political Economy 86 (1), 7995.CrossRefGoogle Scholar
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 28 (3), 323341.CrossRefGoogle Scholar
Ragan, Christopher (1998) On the Believable Benefits of Low Inflation. Bank of Canada working paper 98–15.Google Scholar
Rocheteau, Guillaume and Wright, Randall (2005) Money in search equilibrium, in competitive equilibrium, and in competitive search equilibrium. Econometrica 73 (1), 175202.CrossRefGoogle Scholar
Stockman, Alan C. (1981) Anticipated inflation and the capital stock in a cash-in-advance economy. Journal of Monetary Economics 8 (3), 387393.CrossRefGoogle Scholar
Summers, Lawrence (1991) How should long-term monetary policy be determined? Journal of Money, Credit and Banking 23 (3), 625631.CrossRefGoogle Scholar
Tesfatsion, Leigh and Judd, Kenneth L. (eds.) (2006) Handbook of Computational Economics, Vol. 2. Amsterdam: Elsevier North-Holland.Google Scholar
Woodford, Michael (2003) Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton, NJ: Princeton University Press.Google Scholar
Yun, Tack (2005) Optimal monetary policy with relative price distortions. American Economic Review 95 (1), 89109.CrossRefGoogle Scholar