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

Published online by Cambridge University Press:  10 October 2014

Quamrul Ashraf ,
Boris Gershman  and
Peter Howitt
Quamrul Ashraf
Affiliation:
Williams College
Boris Gershman
Affiliation:
American University
Peter Howitt*
Affiliation:
Brown University and NBER
*
Address correspondence to: Peter Howitt, Department of Economics, Brown University, 64 Waterman Street, Providence, RI 02912, USA; e-mail: Peter_Howitt@brown.edu.
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Abstract

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.

Keywords

Agent-Based Computational ModelInflationPrice DispersionFirm Turnover
Type
Articles
Information
Macroeconomic Dynamics , Volume 20 , Issue 2: Complexity in Economic Systems , March 2016 , pp. 558 - 581
Copyright
Copyright © Cambridge University Press 2014 

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