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How Inflation Affects Macroeconomic Performance: An Agent-Based Computational Investigation

Quamrul Ashraf (), Boris Gershman () and Peter Howitt ()

No 2013-10, Working Papers from American University, Department of Economics

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 percent has a substantial deleterious effect, but lowering it below 3 percent 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.

Keywords: Agent-based computational model; inflation; price dispersion; firm turnover (search for similar items in EconPapers)
JEL-codes: C63 E00 E31 E50 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-cmp and nep-mon
Date: 2013
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https://drive.google.com/open?id=14IPRw8DriIHfg96zNcPd6Uzfl6IK67wR First version, 2013 (application/pdf)

Related works:
Journal Article: HOW INFLATION AFFECTS MACROECONOMIC PERFORMANCE: AN AGENT-BASED COMPUTATIONAL INVESTIGATION (2016) Downloads
Working Paper: How Inflation Affects Macroeconomic Performance: An Agent-Based Computational Investigation (2014) Downloads
Working Paper: How Inflation Affects Macroeconomic Performance: An Agent-Based Computational Investigation (2012) Downloads
Working Paper: How Inflation Affects Macroeconomic Performance: An Agent-Based Computational Investigation (2012) Downloads
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