Self-Organization of Inflation Volatility

Makoto Nirei and José A. Scheinkman
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José A. Scheinkman: Professor, Columbia University, Princeton University and NBER (E-mail: js3317@columbia.edu)

No 19-E-11, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: We present a state-dependent pricing model that generates inflation fluctuations from idiosyncratic shocks to the cost of price changes of individual firms. A firm's nominal price increase, lowers other firms' relative prices, thereby inducing further nominal price increases. This snow-ball effect of repricing causes fluctuations to the aggregate price level without exogenous aggregate shocks. The fluctuations caused by this mechanism are more volatile when the density of firms at the repricing threshold is high, and the density at the threshold is high when the trend inflation level is high. Thus, the model implies that higher trend inflation produces larger volatility of short- term inflation rates. Analytical and numerical analyses show that the model can account for the positive relationship between inflation level and volatility that has been observed empirically.

Keywords: Trend inflation; Inflation volatility; State-dependent pricing; Aggregate fluctuations; Self-organized criticality; Power law (search for similar items in EconPapers)
JEL-codes: E31 (search for similar items in EconPapers)
Date: 2019-07
New Economics Papers: this item is included in nep-bec and nep-mac
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Working Paper: Self-Organization of Inflation Volatility (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:ime:imedps:19-e-11

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