Monetary Policy in Low-Inflation Economies by David E. Altig, Ed Nosal

By David E. Altig, Ed Nosal

All vital banks deal with the availability of cash and credits of their international locations, expanding and reducing them as had to offer what economies have to continue to grow. the way in which imperative banks commonly deal with that activity contains temporary rates of interest. but if inflation is low, critical banks cannot use their ordinary the way to get funds and credits into an economic system that wishes it. a number of essays during this quantity describe the paintings of economists who've investigated difficulties that critical banks may have whilst inflation will get low. different essays examine comparable questions resembling even if an economic system suffers whilst it strikes from excessive inflation to low inflation, what the prices of inflation are to monetary welfare, and even if a little of inflation can really be sturdy for fiscal development.

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Kydland CHAPTER 1 Freeman, etc_mac841 6/30/09 4:10 PM Page 13 The Welfare Cost of Inflation in the Presence of Inside Money 13 increases and more resources in the economy are spent on facilitating transactions, both through the fixed cost for purchasing goods with deposits, λ(1 – j * ), and the time spent to withdraw currency (n*ϕ ). Steady states with lower inflation rates display the mirror image of the high-inflation regimes: Because the alternative value of holding deposits over holding currency diminishes, the cutoff value j * increases and the deposit-tocurrency ratio decreases.

In this light, perhaps Japan during the 1990s offers an important lesson on the difficulty of pursuing an expansionary monetary policy when nominal interest rates are close to zero. Maintaining an option value of monetary policy may be an important counterbalance to the results of Lucas and Freeman, Henriksen, and Kydland—that much of the welfare gain from reducing inflation comes from reducing inflation at very low levels. Examining the welfare cost of inflation surely extends beyond just looking at average inflation rates.

20. Table 3 shows how the values γ and ϕ vary as we change the deposit-tocurrency ratio and the nonreserve portion of M1 divided by the capital stock. 00% annually. 58% of output, respectively. As we see from the last row of this table and from figure 6, the steadystate welfare gains increase by a factor of about five with this alternative calibration. 5%, whereas the cost of increasing inflation from 3% to 50% is about 2%. Table 3: Alternative Calibrations of ␸ and ␥ Benchmark Alt. 1 Alt. 2 Alt.

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