Working Paper: CEPR ID: DP1068
Authors: Bankim Chadha; Daniel Tsiddon
Abstract: This paper examines the distribution of output around capacity when money demand is a non-linear 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.
Keywords: inflation; output variability; stickiness
JEL Codes: E12; E30; E41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trend inflation rate (E31) | variance of output (money market disturbances) (E19) |
| trend inflation rate (E31) | variance of output (goods market disturbances) (E39) |
| critical nonzero trend inflation rate (E31) | variance of output (C29) |
| shocks (positive and negative) (E32) | response of output (C67) |
| trend inflation rate (E31) | speed of return to capacity (D25) |