On the welfare and cyclical implications of moderate trend inflation

Ascari, Guido; Phaneuf, Louis; Sims, Eric R.

doi:10.1016/j.jmoneco.2018.06.001

Cited by 44 publications

(31 citation statements)

References 60 publications

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“…Ascari et al (2015) study optimal inflation in a model with nominal rigidities. As we do, they include wage rigidity, but do not incorporate the ZLB.…”

Section: Related Literaturementioning

confidence: 99%

The Optimal Inflation Target and the Natural Rate of Interest

Andrade¹,

Galı́²,

Bihan³

et al. 2018

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We study how changes in the value of the steady-state real interest rate affect the optimal inflation target, both in the U.S. and the euro area, using an estimated New Keynesian DSGE model that incorporates the zero (or effective) lower bound on the nominal interest rate. We find that this relation is downward sloping, but its slope is not necessarily one-for-one: increases in the optimal inflation rate are generally lower than declines in the steady-state real interest rate. Our approach allows us not only to assess the uncertainty surrounding the optimal inflation target, but also to determine the latter while taking into account the parameter uncertainty facing the policy maker, including uncertainty with regard to the determinants of the steady-state real interest rate. We find that in the currently empirically relevant region for the US as well as the euro area, the slope of the curve is close to -0.9. That finding is robust to allowing for parameter uncertainty.

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“…Ascari et al (2015) study optimal inflation in a model with nominal rigidities. As we do, they include wage rigidity, but do not incorporate the ZLB.…”

Section: Related Literaturementioning

confidence: 99%

The Optimal Inflation Target and the Natural Rate of Interest

Andrade¹,

Galı́²,

Bihan³

et al. 2018

View full text Add to dashboard Cite

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“…Assessing inflation costs in the 0-2% and 2-4% inflation bands allows us to show that raising trend inflation by 2% is more costly from 2% to 4% than from 0% to 2%. Therefore, as Ascari, Phaneuf, and Sims (2018) emphasize, the FED should be cautious when it considers increasing the inflation target by some moderate amount from 2% to 3% or 4%. With the 0-7% inflation band, we can assess how a high level of inflation affects wage dispersion relative to price dispersion.…”

Section: Inflation Costsmentioning

confidence: 99%

“…Following Ascari, Phaneuf, and Sims (2018), our model also accounts for positive trend inflation and real per capita output growth. Despite some similarities, there are three main differences between our approach and theirs.…”

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confidence: 99%

Long‐Run Inflation and the Distorting Effects of Sticky Wages and Technical Change

Phaneuf¹,

Victor²

2018

J of Money Credit Banking

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We show that the Calvo price‐setting model is not necessarily inconsistent with evidence of a weak relation between positive trend inflation and price dispersion. We identify the interaction between sticky wages and technical change as factors disrupting the allocative role of the wage system under positive trend inflation. In turn, this interaction generates inefficient wage dispersion, as opposed to price dispersion, which fuels inflation costs. We conclude that it is too early to dismiss the New Keynesian model as a useful vehicle to assess the costs of inflation.

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“…Erceg et al (2000) employ the model with both price and wage stickiness to show that variability of growth rates of nominal wages implies misalignment of wages, thus an inefficient utilization of labours. The inefficient utilization of labour then is magnified by constant positive trend inflation Ascari et al (2016).…”

Section: Introductionmentioning

confidence: 99%

Welfare Costs of Shifting Trend Inflation: Staggered Wage and Price Contracts

Tô

Thang

2019

Bulletin of Econ Res

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We develop a New Keynesian model featuring staggered price and wage contracts to study welfare costs of exogenous variations in trend inflation. The analyses show that the consequences of constant positive trend inflation and shifting trend inflation are severe, especially when trend inflation is high. Among two channels, staggered wage contracts play a vital role in transmitting adverse impacts of constant and shifting trend inflation into the economy. Without the staggered wage channel, these costs are modest. We also conduct exercises to examine the sensitivity of welfare costs to a wide range of plausible parameters. The results show that if the price and wage friction are sufficiently large, the price and wage indexation level are sufficiently small, or there is upward biased trend inflation process, the welfare costs become larger.

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On the welfare and cyclical implications of moderate trend inflation

Cited by 44 publications

References 60 publications

The Optimal Inflation Target and the Natural Rate of Interest

The Optimal Inflation Target and the Natural Rate of Interest

Long‐Run Inflation and the Distorting Effects of Sticky Wages and Technical Change

Welfare Costs of Shifting Trend Inflation: Staggered Wage and Price Contracts

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