IDEAS home Printed from https://ideas.repec.org/p/bon/boncrc/crctr224_2020_216.html
   My bibliography  Save this paper

The Effects of Trend Inflation on Aggregate Dynamics and Monetary Stabilization

Author

Listed:
  • Andrey Alexandrov

Abstract

I derive a set of new analytic results for the effects of trend inflation on aggregate price and output dynamics in menu cost models. I find that positive trend inflation: (1) induces asymmetry in price and output responses to monetary shocks, (2) leads to price overshooting after large shocks, and (3) destroys the monetary neutrality result for large shocks. Under positive trend inflation, large expansionary monetary interventions lead to output contractions, and smaller expansionary interventions have substantially reduced potency. Using U.S. sectoral data, I provide supporting evidence for these model predictions. Calibrating a general equilibrium model to the U.S. economy, I find sizable effects of trend inflation on monetary stabilization policy. Raising the inflation target from 2% to 4% increases the economy's sensitivity to an adverse markup shock and worsens the stabilization trade-off.

Suggested Citation

  • Andrey Alexandrov, 2020. "The Effects of Trend Inflation on Aggregate Dynamics and Monetary Stabilization," CRC TR 224 Discussion Paper Series crctr224_2020_216, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2020_216
    as

    Download full text from publisher

    File URL: https://www.crctr224.de/research/discussion-papers/archive/dp216
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Fernando Alvarez & Francesco Lippi, 2022. "The Analytic Theory of a Monetary Shock," Econometrica, Econometric Society, vol. 90(4), pages 1655-1680, July.
    2. Fernando Alvarez & Andrea Ferrara & Erwan Gautier & Hervé Le Bihan & Francesco Lippi, 2021. "Empirical Investigation of a Sufficient Statistic for Monetary Shocks," Working papers 839, Banque de France.
    3. Isaac Baley & Andrés Blanco, 2021. "Aggregate Dynamics in Lumpy Economies," Econometrica, Econometric Society, vol. 89(3), pages 1235-1264, May.
    4. Fernando Alvarez & Francesco Lippi & Aleksei Oskolkov, 2023. "The Macroeconomics of Sticky Prices with Generalized Hazard Functions," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 137(2), pages 989-1038.
    5. Hong, Gee Hee & Klepacz, Matthew & Pasten, Ernesto & Schoenle, Raphael, 2023. "The real effects of monetary shocks: Evidence from micro pricing moments," Journal of Monetary Economics, Elsevier, vol. 139(C), pages 1-20.
    6. Fernando Alvarez & Francesco Lippi & Aleksei Oskolkov, 2022. "The Macroeconomics of Sticky Prices with Generalized Hazard Functions [“Optimal Inattention to the Stock Market With Information Costs and Transactions Costs,”]," The Quarterly Journal of Economics, Oxford University Press, vol. 137(2), pages 989-1038.

    More about this item

    Keywords

    trends; asymmetry; trend inflation; aggregate dynamics;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bon:boncrc:crctr224_2020_216. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CRC Office (email available below). General contact details of provider: https://www.crctr224.de .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.