How Inflation Affects Macroeconomic Performance: An Agent-Based Computational Investigation
27 Pages Posted: 7 Jul 2012 Last revised: 6 Jul 2013
There are 3 versions of this paper
How Inflation Affects Macroeconomic Performance: An Agent-Based Computational Investigation
How Inflation Affects Macroeconomic Performance: An Agent-Based Computational Investigation
How Inflation Affects Macroeconomic Performance: An Agent-Based Computational Investigation
Date Written: June 30, 2013
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 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.
Keywords: agent-based computational model, inflation, price dispersion, firm turnover
JEL Classification: C63, E00, E31, E50
Suggested Citation: Suggested Citation
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