Inflation, nominal interest rates and the variability of output

Bankim Chadha*, Daniel Tsiddon

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

4 Scopus citations

Abstract

This paper examines the distribution of output around capacity when money demand is a nonlinear function of the nominal interest rate such that nominal interest rates cannot become negative. When fluctuations in output result primarily from disturbances to the money market, the variance of output is shown to be an increasing function of the trend inflation rate. When they result from disturbances to the goods market, the variance of output is a decreasing function of the trend inflation rate. When both disturbances are significant, there exists, in general, a critical non-zero trend inflation rate that minimizes the variance of output.

Original languageEnglish
Pages (from-to)547-573
Number of pages27
JournalJournal of Monetary Economics
Volume42
Issue number3
DOIs
StatePublished - 12 Oct 1998

Keywords

  • E31
  • E32
  • E37
  • E52
  • Inflation
  • Output volatility
  • Price stability

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