HOW INFLATION AFFECTS MACROECONOMIC PERFORMANCE: AN AGENT-BASED COMPUTATIONAL INVESTIGATION

Quamrul Ashraf, Boris Gershman and Peter Howitt

Macroeconomic Dynamics, 2016, vol. 20, issue 2, 558-581

Abstract: We use an agent-based computational approach to show how inflation can worsen macroeconomic performance by disrupting the mechanism of exchange in a decentralized market economy. We find that, in our model economy, increasing the trend rate of inflation above 3% has a substantial deleterious effect, but lowering it below 3% has no significant macroeconomic consequences. Our finding remains qualitatively robust to changes in parameter values and to modifications to our model that partly address the Lucas critique. Finally, we contribute a novel explanation for why cross-country regressions may fail to detect a significant negative effect of trend inflation on output even when such an effect exists in reality.

Date: 2016
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Related works:
Working Paper: How Inflation Affects Macroeconomic Performance: An Agent-Based Computational Investigation (2014)
Working Paper: How Inflation Affects Macroeconomic Performance: An Agent-Based Computational Investigation (2013)
Working Paper: How Inflation Affects Macroeconomic Performance: An Agent-Based Computational Investigation (2012)
Working Paper: How Inflation Affects Macroeconomic Performance: An Agent-Based Computational Investigation (2012)
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