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Inflation Central :: Inflation-Related Articles

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Title Date Publication Author(s)
Inflation and Welfare: A Search Approach
January 2006 Policy Discussion Paper Craig, Ben/Rocheteau, Guillaume
Abstract
This paper extends recent findings in the search-theoretic literature on monetary exchange regarding the welfare costs of inflation. We present first estimates of the welfare cost of inflation using the "welfare triangle" methodology of Bailey (1958) and Lucas (2000). We then derive a money demand function from the search-theoretic model of Lagos and Wright (2005) and we estimate it from U.S. data over the period 1900-2000. We show that the welfare cost of inflation predicted by the model accords with the welfare-triangle measure when pricing mechanisms are such that buyers appropriate the social marginal benefit of their real balances. For other mechanisms, welfare triangles underestimate the true welfare cost of inflation because of a rent-sharing externality. We also point out other inefficiencies associated with noncompetitive pricing, which matter for estimating the cost of inflation. We then illustrate how endogenous participation decisions can mitigate or exacerbate the cost of inflaion, and we provide calibrated examples in which a deviation from the Friedman rule is optimal. Finally, we discuss distributional effects of inflation.

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Inflation, output, and welfare
Aug-01-2004 Working Paper Lagos, Ricardo/Rocheteau, Guillaume
Abstract
This paper studies the effects of anticipated inflation on aggregate output and welfare within a search-theoretic framework. We allow money-holders to choose the intensities with which they search for trading partners, so inflation affects the frequency of trade as well as the quantity of output produced in each trade. We consider the standard pricing mechanism for search models, i.e., ex-post bargaining, as well as a notion of competitive pricing. If prices are bargained over, the equilibrium is generically inefficient and an increase in inflation reduces buyers' search intensities, output, and welfare. If prices are posted and buyers can direct their search, search intensities are increasing with inflation for low inflation rates and decreasing for high inflation rates. The Friedman rule achieves the first best allocation and inflation always reduces welfare even though it can have a positive effect on output for low inflation rates.

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Capital trading, stock trading, and the inflation tax on equity: a note
Dec-01-2003 Working Paper Baier, Scott L./Carlstrom, Charles T./Chami, Ralph/Cosimano, Thomas F./Fuerst, Timothy S./Fullenkamp, Collen
Abstract
The authors show that there is more responsiveness of consumption and output to changes in the money supply than exists in the standard neoclassical growth models.

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Inflation and financial market performance: what have we learned in the last ten years
Dec-01-2003 Working Paper Boyd, John/Champ, Bruce
Abstract
The last decade has witnessed a great deal of theoretical and empirical research on the relationships between inflation, financial market performance, and economic growth. This paper provides a survey of that literature and presents new cross-country empirical results on this topic. We find that inflation is negatively associated with banking industry size, real returns on financial assets, and bank profitability. We also discover a positive relationship between asset return volatility and inflation.

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Putting "M" back in monetary policy
Jan-01-2003 Proceedings Leeper, Eric Michael/Roush, Jennifer E./Smets, Frank
Abstract
Money demand and the stock of money have all but disappeared from monetary policy analyses. Remarkably, it is more common for empirical work on monetary policy to include commodity prices than to include money. This paper establishes and explores the empirical fact that whether money enters a model and how it enters matters for inferences about policy impacts. The way money is modeled significantly changes the size of output and inflation effects, and the degree of inertia that inflation exhibits following a policy shock. We offer a simple and conventional economic interpretation of these empirical facts.

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Do energy-price shocks affect core-price measures?
Nov-01-2002 Working Paper Humpage, Owen/Pelz, Eduard
Abstract
This paper investigates the relationship between energy-price shocks and three core measures of inflation in a vector autoregression model that incorporates measures of monetary policy and inflation expectations. The sample set includes data at monthly frequencies from 1980 through 2000. The authors find that that positive energy-price shocks have significant, though small, effects on all core-price measures after a lag of 12 to 18 months, but that negative shocks have no discernable impact. The results suggest that relative energy-price changes do not distort the inflation signals that standard core-price measures provide.

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Is it more expensive, or does it just cost more money?
May-01-2002 Economic Commentary Bryan, Michael F.
Abstract
Most of us, from the general public to professional economists, use the term inflation pretty loosely. It's increasingly applied to any rise in prices, and even economists use it interchangeably with a rise in the cost of living. This Commentary explains what inflation is, why it should be kept distinct from a rise in the cost of living, and how some statistical measures attempt to distinguish between the two.

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Does it matter (for equilibrium determinacy) what price index the central bank targets?
Apr-01-2002 Working Paper Carlstrom, Charles T./Fuerst, Timothy S./Ghironi, Fabio
Abstract
What inflation rate should the central bank target? The authors address determinacy issues related to this question in a two-sector model in which prices can differ in equilibrium. They assume that the degree of nominal price stickiness can vary across sectors and that labor is immobile. This paper's contribution is to demonstrate that a modified Taylor principle holds in this environment. If the central bank elects to target sector A and responds to price movements in this sector with a coefficient greater than unity, then this policy rule will ensure determinacy across all sectors. These results have at least two implications: First, the equilibrium-determinacy criterion does not imply a preference for any particular inflation measure. Second, since the Taylor principle applies at the sectoral level, the principle is unnecessary at the aggregate level.

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Forward-looking versus backward-looking Taylor rules
Aug-01-2000 Working Paper Carlstrom, Charles T./Fuerst, Timothy S.
Abstract
This paper analyzes the restrictions necessary to ensure that the policy rule used by the central bank does not introduce real indeterminacy into the economy. It conducts this analysis in a flexible price economy and a sticky price model. A robust conclusion is that to ensure determinacy, the monetary authority should follow a backward-looking rule where the nominal interest rate responds aggressively to past inflation rates.

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Does wage inflation cause price inflation?
Apr-01-2000 Policy Discussion Paper Hess, Gregory D./Schweitzer, Mark E.
Abstract
Is there any evidence to support the assumption that increased wages cause inflation? This study updates and expands earlier research into this question and finds little support for the view that higher wages cause higher prices. On the contrary, more evidence is found for higher prices leading to wage growth.

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Will electricity deregulation push inflation lower?
Feb-12-2000 Economic Review Schweitzer, Mark E./Thompson, Eric C.
Abstract
Deregulation of electricity generation will offer consumers many advantages, including dramatically lower energy costs. From a macroeconomic viewpoint, electricity purchases are interesting because they are a major component of consumers' budgets (and thus of the CPI) and a large factor of production for many companies. This raises the possibility that electricity deregulation could create a substantial shock to the overall price trend, comparable to other recent energy shocks. The benefits to consumers and producers identified in this article strongly support legislative efforts to increase competition in one of the last strongholds of regulated profits.

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What labor market theory tells us about the "New Economy"
Sep-01-1998 Economic Review Gomme, Paul
Abstract
An investigation of whether economic theory supports the claim that a technology shock can change the "natural rate of unemployment."

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Efficient inflation estimation
Aug-01-1997 Working Paper Bryan, Michael F./Cecchetti, Stephen G./Wiggins, Rodney L. II
Abstract
An investigation of the use of trimmed means as high-frequency estimators of inflation.

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Identifying inflation's grease and sand effects in the labor market
Jul-01-1997 Working Paper Groshen, Erica L./Schweitzer, Mark E.
Abstract
An effort to distinguish inflation's distortionary effects from its facilitation of adjustments to shocks when wages are rigid downward. It uses the following identification strategy: Inflation-induced deviations among employers' mean wage changes represent unintended intramarket distortions (sand), while inflation-induced, interoccupational wage changes reflect adjustments that might have been prevented by nominal wage rigidity (grease).

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Estimating the cost of U.S. indexed bonds
Jan-01-1997 Working Paper Foresi, Silverio/Penati, Alessandro/Pennacchi, George
Abstract
A presentation of an equilibrium bond-pricing model driven by two stochastic factors: the real interest rate and the expected rate of inflation. The model's parameters are estimated using a maximum-likelihood technique based on a Kalman filter.

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Inflation and financial market performance
Dec-01-1996 Working Paper Boyd, John H./Levine, Ross E./Smith, Bruce D.
Abstract
An exploration of the cross-sectional relationship between inflation and an array of indicators of financial market conditions, using time-averaged data covering several decades and a large number of countries

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The consumer price index as a measure of inflation
Dec-01-1993 Economic Review Bryan, Michael F./Cecchetti, Stephen G.
Abstract
One problem associated with using the Consumer Price Index as a focal point in monetary policy deliberations is the likelihood that it is a biased measure of inflation. The authors use a simple statistical framework in this paper to estimate a price index that is immune to some of these weighting biases. By computing the common inflation element in a broad cross-section of consumer price changes, they find evidence of a positive weighting bias between 1967 and 1981, and an insignificant bias in the years since then.

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Measuring core inflation
Jun-01-1993 Working Paper Bryan, Michael F./Cecchetti, Stephen G.
Abstract
An analysis of the use of limited-information estimators as measures of core inflation, showing that these estimators, such as the median of the cross-sectional distribution of inflation, have a higher correlation with past money growth and deliver improved forecasts of future inflation relative to the Consumer Price Index.

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