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IS MODERATE-TO-HIGH INFLATION INHERENTLY UNSTABLE?

Michael Kiley ()

No 193, Econometric Society 2004 North American Summer Meetings from Econometric Society

Abstract: The data across time and countries suggest that moderate-to-high inflation and inflation volatility are highly correlated. This paper examines the effect of trend inflation on the ability of the monetary authority to ensure a determinate equilibrium and macroeconomic stability in a sticky-price model. Trend inflation increases the importance of future marginal costs for current price-setters in a staggered price-setting model. The greater importance of expectations makes it more difficult for the monetary authority to ensure stability; in fact, equilibrium determinacy cannot be achieved through reasonable specifications of nominal interest rate (Taylor) rules at moderate-to-high levels of inflation (for example, at levels below 8 percent per year). If monetary policymakers have followed these types of policy rules in the past, this result may explain why moderate-to-high inflation is associated with inflation volatility. It also suggests a revision to interpretations of the 1970s. At that time, inflation in many countries was at least moderate, which can contribute to economic instability. The results suggest that some moderate-inflation countries that have recently adopted inflation targeting may want to commit to low target inflation rates

Keywords: Monetary policy; equilibrium determinacy; Taylor rule; sunspot fluctuations (search for similar items in EconPapers)
JEL-codes: E3 E5 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-mac and nep-mon
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Related works:
Journal Article: Is Moderate-to-High Inflation Inherently Unstable? (2007) Downloads
Working Paper: Is moderate-to-high inflation inherently unstable? (2004) Downloads
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