Inflation, Nominal Interest Rates, and the Variability of Output
October 1, 1996
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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.
Subject: Capacity utilization, Demand for money, Financial services, Inflation, Monetary base, Money, Prices, Production, Real interest rates
Keywords: Capacity utilization, Demand for money, Inflation, inflation rate rise, long-run inflation rate influence, Monetary base, money demand function, nominal interest rate, price level, rate of inflation, Real interest rates, shock term, trend inflation rate, WP
Pages:
36
Volume:
1996
DOI:
Issue:
109
Series:
Working Paper No. 1996/109
Stock No:
WPIEA1091996
ISBN:
9781451853162
ISSN:
1018-5941
