## Inflation, Nominal Interest Rates, and the Variability of Output

_IMF Working Papers, October 1, 1996_

## Source details

**Canonical URL:** [Inflation, Nominal Interest Rates, and the Variability of Output](https://www.imf.org/en/publications/wp/issues/2016/12/30/inflation-nominal-interest-rates-and-the-variability-of-output-2081)

## Other formats

- [Markdown version](/en/publications/wp/issues/2016/12/30/inflation-nominal-interest-rates-and-the-variability-of-output-2081/index.md)
- [Structured JSON version](/en/publications/wp/issues/2016/12/30/inflation-nominal-interest-rates-and-the-variability-of-output-2081/index.json)
- [Bundle manifest](/en/publications/wp/issues/2016/12/30/inflation-nominal-interest-rates-and-the-variability-of-output-2081/bundle-manifest.json)

## Bibliographic details
- Authors: Bankim Chadha, Daniel Tsiddon
- Published: October 1, 1996
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451853162.001

---

### Summary and central result
- 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.
- Key comparative-statics findings:
  - When fluctuations in output result primarily from disturbances to the money market, the variance of output is an increasing function of the trend inflation rate.
  - When fluctuations in output result primarily 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.

### Analytical framework and mechanisms
- Money demand specification:
  - Money demand is modeled as a nonlinear function of the nominal interest rate, with the property that nominal interest rates cannot become negative.
- Channels emphasized:
  - Money-market disturbances: amplify output variance as trend inflation rises.
  - Goods-market disturbances: reduce output variance as trend inflation rises.
  - Interaction of both disturbance types: generates a non-monotonic relationship between trend inflation and output variance, implying an interior optimal trend inflation rate that minimizes output variability.

### Subjects and keywords (as listed)
- 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

---


_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/inflation-nominal-interest-rates-and-the-variability-of-output-2081_