Inflation, Nominal Interest Rates and the Variability of Output

Bankim Chadha and Daniel Tsiddon

No 1068, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper examines the distribution of output around capacity when money demand is a non-linear function of the nominal interest rate such that nominal interest rates cannot become negative. When fluctuations in output result primarily from disturbances to the money market, the variance of output is shown to be an increasing function of the trend inflation rate. When they result from disturbances to the goods market, the variance of output is a decreasing function of the trend inflation rate. When both disturbances are significant, there exists, in general, a critical non-zero trend inflation rate that minimizes the variance of output.

Keywords: Inflation; Output Variability; Stickiness (search for similar items in EconPapers)
JEL-codes: E12 E30 E41 (search for similar items in EconPapers)
Date: 1994-11
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Inflation, nominal interest rates and the variability of output (1998)
Working Paper: Inflation, Nominal Interest Rates, and the Variability of Output (1996)
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