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On the Welfare and Cyclical Implications of Moderate Trend Inflation

Guido Ascari, Louis Phaneuf, Eric Sims

NBER Working Paper No. 21392
Issued in July 2015
NBER Program(s):The Economic Fluctuations and Growth Program, The Monetary Economics Program

We offer a comprehensive evaluation of the welfare and cyclical implications of moderate trend inflation. In an extended version of a medium-scale New Keynesian model, recent proposals to increase trend inflation from 2 to 4 percent would generate a consumption-equivalent welfare loss of 3.7 percent based on the non-stochastic steady state and of 6.9 percent based on the stochastic mean. Welfare costs of this magnitude are driven by four main factors: i) multiperiod nominal wage contracting, ii) trend growth in investment-specific and neutral technology, iii) roundaboutness in the U.S. production structure, and iv) and the interaction between trend inflation and shocks to the marginal efficiency of investment (MEI), insofar that this type of shock is sufficiently persistent. Moreover, moderate trend inflation has important cyclical implications. It interacts much more strongly with MEI shocks than with either productivity or monetary shocks.

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Document Object Identifier (DOI): 10.3386/w21392

Published: Guido Ascari & Louis Phaneuf & Eric R. Sims, 2018. "On the Welfare and Cyclical Implications of Moderate Trend Inflation," Journal of Monetary Economics, . citation courtesy of

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