On Nonlinear Effects of Inflation Across Countries

Abstract

Many emerging market economies have a higher tolerance for inflation than industrialized economies. Recent empirical studies find nonlinear effects of inflation and that the threshold rate is higher for emerging countries. Motivated by the fact that emerging countries have higher business costs, this paper incorporates entrepreneurial occupational choices in a parsimonious monetary model and rationalizes the observed different thresholds rates. The reason is that business costs distort the occupational decisions and affect the inflation-output tradeoff.

Keywords: monetary policy, inflation, entrepreneurship, business costs, nonlinear effects

JEL Classification: E31, E41, E52, E58, J24, L26