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Self-Organization of Inflation Volatility

Author

Listed:
  • Makoto Nirei

    (Professor, Department of Economics, University of Tokyo (E-mail: nirei@e.u-tokyo.ac.jp))

  • José A. Scheinkman

    (Professor, Columbia University, Princeton University and NBER (E-mail: js3317@columbia.edu))

Abstract

We present a state-dependent pricing model that generates inflation fluctuations from idiosyncratic shocks to the cost of price changes of individual firms. A firm's nominal price increase, lowers other firms' relative prices, thereby inducing further nominal price increases. This snow-ball effect of repricing causes fluctuations to the aggregate price level without exogenous aggregate shocks. The fluctuations caused by this mechanism are more volatile when the density of firms at the repricing threshold is high, and the density at the threshold is high when the trend inflation level is high. Thus, the model implies that higher trend inflation produces larger volatility of short- term inflation rates. Analytical and numerical analyses show that the model can account for the positive relationship between inflation level and volatility that has been observed empirically.

Suggested Citation

  • Makoto Nirei & José A. Scheinkman, 2019. "Self-Organization of Inflation Volatility," IMES Discussion Paper Series 19-E-11, Institute for Monetary and Economic Studies, Bank of Japan.
    • Handle: RePEc:ime:imedps:19-e-11
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    References listed on IDEAS

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    More about this item

    Keywords

    Trend inflation; Inflation volatility; State-dependent pricing; Aggregate fluctuations; Self-organized criticality; Power law;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

    NEP fields

    This paper has been announced in the following NEP Reports:

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