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Title: The Case for Inflation Stability

Author(s): Fabrice Collard and Harris Dellas

Publication Date: October 2003

Keyword(s): distortions, inflation stabilization, investment and price rigidity

Programme Area(s): International Macroeconomics

Abstract: We evaluate the case for perfect price (inflation) stabilization in a New Keynesian (NNS) model that includes capital accumulation, a variety of shocks, a monetary and an imperfect competition distortion. In such a model, price rigidity may provide the monetary authorities with an opportunity to improve upon the inefficient flexible price equilibrium via the suitable cyclical manipulation of real marginal costs. We find that such an opportunity is of limited value. With only the imperfect competition friction present (in the ?cashless? version of the model), inflation variability is costly independent of the level of capital adjustment costs, the degree of price rigidity, the size of mark-ups, the degree of risk aversion and the type of the shock. A small amount of inflation variability may become desirable when prices are fairly flexible and capital adjustment costs low if the model includes both frictions.

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Bibliographic Reference

Collard, F and Dellas, H. 2003. 'The Case for Inflation Stability'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4082