Self-Organization of Inflation Volatility

Makoto Nirei and Jose Scheinkman
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Jose Scheinkman: Columbia University

No 1451, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: We present a state-dependent pricing model that generates inflation fluctuations from idiosyncratic shocks on firms. A firm's nominal price increase lowers the other firms' relative prices, thereby inducing those firms' nominal price increases. This snow-ball effect of repricing causes the fluctuations of aggregate price without exogenous aggregate shocks. The fluctuations caused by this mechanism are more volatile when the density of firms at repricing threshold is high, and the density at the threshold is high when the trend inflation level is high. Thus, the model implies that the higher trend inflation causes the 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.

Date: 2019
New Economics Papers: this item is included in nep-bec, nep-dge and nep-mon
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Working Paper: Self-Organization of Inflation Volatility (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:1451

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