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1 results

  • HOW INFLATION AFFECTS MACROECONOMIC PERFORMANCE: AN AGENT-BASED COMPUTATIONAL INVESTIGATION

  • Quamrul Ashraf, Boris Gershman, Peter Howitt
  • Journal:
    Macroeconomic Dynamics / Volume 20 / Issue 2 / March 2016
    Published online by Cambridge University Press:
    10 October 2014, pp. 558-581

  • We use an agent-based computational approach to show how inflation can worsen macroeconomic performance by disrupting the mechanism of exchange in a decentralized market economy. We find that, in our model economy, increasing the trend rate of inflation above 3% has a substantial deleterious effect, but lowering it below 3% has no significant macroeconomic consequences. Our finding remains qualitatively robust to changes in parameter values and to modifications to our model that partly address the Lucas critique. Finally, we contribute a novel explanation for why cross-country regressions may fail to detect a significant negative effect of trend inflation on output even when such an effect exists in reality.