Welfare costs of shifting trend inflation

Taisuke Nakata

Journal of Macroeconomics, 2014, vol. 41, issue C, 66-78

Abstract: This paper studies the welfare consequences of exogenous variations in trend inflation in a New Keynesian economy. Consumption and leisure respond asymmetrically to a rise and a decline in trend inflation. As a result, an increase in the variance of shocks to the trend inflation process decreases welfare not only by increasing the volatilities of consumption and leisure, but also by decreasing their average levels. I find that the welfare cost of drifting trend inflation is modest and that it comes mainly from reduced average levels of consumption and leisure, not from their increased volatilities.

Keywords: The great inflation; Second-order approximation; Trend inflation; Welfare (search for similar items in EconPapers)
JEL-codes: C63 E31 E52 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (2)

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Working Paper: Welfare costs of shifting trend inflation (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:41:y:2014:i:c:p:66-78

DOI: 10.1016/j.jmacro.2014.05.001

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