Inflation and the Great Ratios: Long-Term Evidence from the U.S.

44 Pages Posted: 7 Apr 1999

See all articles by Shaghil Ahmed

Shaghil Ahmed

Board of Governors of the Federal Reserve System

John H. Rogers

Board of Governors of the Federal Reserve System - Trade and Financial Studies Section

Date Written: October 1998

Abstract

Using over 100 years of U.S. data, we find that the long-run effects of inflation on consumption, investment, and output are positive. Thus, models generating long-term negative effects of inflation on output and consumption (including endogenous growth and RBC models with money) seem to be at odds with data from the moderate inflation rate environment we consider. Also, great ratios like the consumption and investment rates are not independent of inflation, which we interpret in terms of the Fisher effect. However, in the full sample, the variability of the stochastic inflation trend is small relative to the variability of the productivity and fiscal trends, so inflation accounts for little of the movements in real variables. By comparison, we find in the post-WWII sub-period that although significant "permanent" shocks to inflation are a more regular feature of the data, the long-run real effects of a given size inflation shock are much smaller.

JEL Classification: E31, E32

Suggested Citation

Ahmed, Shaghil and Rogers, John H., Inflation and the Great Ratios: Long-Term Evidence from the U.S. (October 1998). FRB International Finance Discussion Paper No. 628. Available at SSRN: https://ssrn.com/abstract=140614 or http://dx.doi.org/10.2139/ssrn.140614

Shaghil Ahmed (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC
United States

John H. Rogers

Board of Governors of the Federal Reserve System - Trade and Financial Studies Section ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2873 (Phone)
202-736-5638 (Fax)

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