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Inflation, Nominal Interest Rates, and the Variability of Output
Author:
Mr. Bankim Chadha
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Daniel Tsiddon null

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Series:
IMF Working Papers
Volume/Issue:
Volume 1996: Issue 109
Language:
English
Publication Date:
01 Oct 1996
DOI:
https://doi.org/10.5089/9781451853162.001
ISBN:
9781451853162
ISSN:
1018-5941
Pages:
36
Keywords:
WP; rate of inflation; price level; nominal interest rate; trend inflation rate; inflation rate rise; money demand function; long-run inflation rate influence; shock term; Inflation; Demand for money; Capacity utilization; Monetary base; Real interest rates
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund