# The inflationary bias of real uncertainty and the harmonic Fisher equation

*Ioannis Karatzas* (),
*Martin Shubik*,
*William Sudderth* () and
*John Geanakoplos* ()

*Economic Theory*, 2006, vol. 28, issue 3, 481-512

**Abstract:**
We argue that real uncertainty itself causes long-run nominal inflation. Consider an infinite horizon cash-in-advance economy with a representative agent and real uncertainty, modeled by independent, identically distributed endowments. Suppose the central bank fixes the nominal rate of interest. We show that the equilibrium long-run rate of inflation is strictly higher, on almost every path of endowment realizations, than it would be if the endowments were constant. Indeed, we present an explicit formula for the long-run rate of inflation, based on the famous Fisher equation. The Fisher equation says the short-run rate of inflation should equal the nominal rate of interest less the real rate of interest. The long-run Fisher equation for our stochastic economy is similar, but with the rate of inflation replaced by the harmonic mean of the growth rate of money. Copyright Springer-Verlag Berlin/Heidelberg 2006

**Keywords:** Inflation; Equilibrium; Control; Interest rate; Central bank; Harmonic Fisher equation. (search for similar items in EconPapers)

**Date:** 2006

**References:** Add references at CitEc

**Citations:** View citations in EconPapers (11) Track citations by RSS feed

**Downloads:** (external link)

http://hdl.handle.net/10.1007/s00199-005-0648-z (text/html)

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:spr:joecth:v:28:y:2006:i:3:p:481-512

**Ordering information:** This journal article can be ordered from

http://www.springer. ... eory/journal/199/PS2

Access Statistics for this article

Economic Theory is currently edited by *Nichoals Yanneils*

More articles in Economic Theory from Springer, Society for the Advancement of Economic Theory (SAET) Contact information at EDIRC.

Bibliographic data for series maintained by Sonal Shukla ().