How Inflation Affects Macroeconomic Performance: An Agent-Based Computational Investigation

28 Pages Posted: 14 Jul 2012

See all articles by Quamrul H. Ashraf

Quamrul H. Ashraf

Williams College - Department of Economics

Boris Gershman

American University - Department of Economics

Peter Howitt

Brown University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: July 2012

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 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.

Suggested Citation

Ashraf, Quamrul H. and Gershman, Boris and Howitt, Peter, How Inflation Affects Macroeconomic Performance: An Agent-Based Computational Investigation (July 2012). NBER Working Paper No. w18225. Available at SSRN: https://ssrn.com/abstract=2105970

Quamrul H. Ashraf (Contact Author)

Williams College - Department of Economics ( email )

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HOME PAGE: http://econ.williams.edu/profile/qha1/

Boris Gershman

American University - Department of Economics ( email )

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Washington, DC 20016-8029
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HOME PAGE: http://nw08.american.edu/~gershman/

Peter Howitt

Brown University - Department of Economics ( email )

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Providence, RI 02912
United States
401-863-2145 (Phone)
401-863-1970 (Fax)

National Bureau of Economic Research (NBER)

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