The implications of inflation in an estimated New-Keynesian model

Pablo Guerron

No 10-2, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: This paper studies the steady state and dynamic consequences of inflation in an estimated dynamic stochastic general equilibrium model of the U.S. economy. It is found that 10 percentage points of inflation entails a steady state welfare cost as high as 13 percent of annual consumption. This large cost is mainly driven by staggered price contracts and price indexation. The transition from high to low inflation inflicts a welfare loss equivalent to 0.53 percent. The role of nominal/real frictions as well as that of parameter uncertainty is also addressed.

Keywords: Inflation (Finance); Econometric models; Keynesian economics (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Journal Article: The implications of inflation in an estimated new Keynesian model (2011)
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