On the Welfare and Cyclical Implications of Moderate Trend Inflation

Guido Ascari, Louis Phaneuf and Eric Sims ()

No 763, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: Abstract We offer a comprehensive evaluation of the welfare and cyclical implications of moderate trend inflation. In an extended version of a medium-scale New Keynesian model, recent proposals to increase trend inflation from 2 to 4 percent would generate a consumption-equivalent welfare loss of 3.7 percent based on the non-stochastic steady state and of 6.9 percent based on the stochastic mean. Welfare costs of this magnitude are driven by four main factors: i) multiperiod nominal wage contracting, ii) trend growth in investment-specific and neutral technology, iii) roundaboutness in the U.S. production structure, and iv) and the interaction between trend inflation and shocks to the marginal efficiency of investment (MEI), insofar that this type of shock is sufficiently persistent. Moreover, moderate trend inflation has important cyclical implications. It interacts much more strongly with MEI shocks than with either productivity or monetary shocks.

Keywords: Wage and price contracting; trend inflation; trend growth in technology; roundabout production; investment shocks; inflation costs; business cycles. (search for similar items in EconPapers)
JEL-codes: E31 E32 (search for similar items in EconPapers)
Date: 2015-11-03
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Related works:
Journal Article: On the welfare and cyclical implications of moderate trend inflation (2018)
Working Paper: On the Welfare and Cyclical Implications of Moderate Trend Inflation (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:oxf:wpaper:763

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