Welfare Costs of Shifting Trend Inflation

21 Pages Posted: 6 Apr 2013

See all articles by Taisuke Nakata

Taisuke Nakata

Board of Governors of the Federal Reserve System

Date Written: February 6, 2013

Abstract

This paper studies the welfare consequences of exogenous variations in trend inflation in a New Keynesian economy. Consumption and leisure respond asymmetrically to a rise and a decline in trend inflation. As a result, an increase in the variance of shocks to the trend inflation process decreases welfare not only by increasing the volatilities of consumption and leisure, but also by decreasing their average levels. I find that the welfare cost of drifting trend inflation is modest and that it comes mainly from reduced average levels of consumption and leisure, not from their increased volatilities.

Keywords: Great inflation, second-order approximation, trend inflation, welfare

JEL Classification: C63, E31, E52

Suggested Citation

Nakata, Taisuke, Welfare Costs of Shifting Trend Inflation (February 6, 2013). FEDS Working Paper No. 2013-12. Available at SSRN: https://ssrn.com/abstract=2245626 or http://dx.doi.org/10.2139/ssrn.2245626

Taisuke Nakata (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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