Inflation, Nominal Interest Rates, and the Variability of Output

Bankim Chadha and Daniel Tsiddon

No 1996/109, IMF Working Papers from International Monetary Fund

Abstract: This paper examines the distribution of output around capacity when money demand is a nonlinear function of the nominal interest rate such that nominal interest rates cannot become negative. When fluctuations in output result primarily from disturbances to the money market, the variance of output is shown to be an increasing function of the trend inflation rate. When they result from disturbances to the goods market, the variance of output is a decreasing function of the trend inflation rate. When both disturbances are significant, there exists, in general, a critical non-zero trend inflation rate that minimizes the variance of output.

Keywords: WP; rate of inflation; price level; nominal interest rate; trend inflation rate; inflation rate rise; money demand function; long-run inflation rate influence; shock term; Inflation; Demand for money; Capacity utilization; Monetary base; Real interest rates (search for similar items in EconPapers)
Pages: 36
Date: 1996-10-01
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Inflation, nominal interest rates and the variability of output (1998)
Working Paper: Inflation, Nominal Interest Rates and the Variability of Output (1994)
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