The Unavoidability of Low Inflation–Low Output Traps

Narayana Kocherlakota

The Review of Economic Studies, 2022, vol. 89, issue 6, 3410-3435

Abstract: Since the collapse of the Bretton Woods monetary system, the monies of the developed world have been unbacked by any formal promise of convertibility. Yet, inflation has typically undershot, not overshot, central bank targets over the past couple decades. The low, while generally positive, inflation rate has (more arguably) been associated with low output and low growth. In this article, I consider these observations through the lens of a class of representative agent rational expectations models with nominal (price-setting) frictions and the possibility of firm entry/exit. I show that for any level of nominal frictions (no matter how small) and for any monetary policy rule that satisfies a set of weak restrictions, there is a large set of equilibria that exhibit permanently low inflation, low output, and low nominal interest rates. These equilibria can only exhibit positive long-run inflation if growth is low and the specification of nominal frictions (i.e. the Phillips curve) takes an unconventional but nonetheless empirically plausible form.

Keywords: Inflation; Output; Multiple equilibria; Firm exit/entry; E31; E32; E52 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/10.1093/restud/rdac009 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:89:y:2022:i:6:p:3410-3435.

Access Statistics for this article

The Review of Economic Studies is currently edited by Thomas Chaney, Xavier d’Haultfoeuille, Andrea Galeotti, Bård Harstad, Nir Jaimovich, Katrine Loken, Elias Papaioannou, Vincent Sterk and Noam Yuchtman

More articles in The Review of Economic Studies from Review of Economic Studies Ltd
Bibliographic data for series maintained by Oxford University Press ().