Inflation, Nominal Interest Rates, and the Variability of Output

Author/Editor:

Bankim Chadha ; Daniel Tsiddon

Publication Date:

October 1, 1996

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 1996/109

Subject:

Capacity utilization Demand for money Financial services Inflation Monetary base Money Prices Production Real interest rates

English

Publication Date:

October 1, 1996

ISBN/ISSN:

9781451853162/1018-5941

Stock No:

WPIEA1091996

Pages:

36

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