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The Inflationary Bias of Real Uncertainty and the Harmonic Fisher Equation
We argue that real uncertainty itself causes long-run nominal inflation. Consider an infinite horizon cash-in-advance economy with a representative agent and real uncertainty, modeled by independent, identically distributed endowments. Suppose the central bank fixes the nominal rate of interest. We...
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| Published in: | Economic theory 2006-08, Vol.28 (3), p.481-512 |
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| Main Authors: | , , , |
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| Language: | English |
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| container_end_page | 512 |
| container_issue | 3 |
| container_start_page | 481 |
| container_title | Economic theory |
| container_volume | 28 |
| creator | Karatzas, Ioannis Shubik, Martin Sudderth, William D. Geanakoplos, John |
| description | We argue that real uncertainty itself causes long-run nominal inflation. Consider an infinite horizon cash-in-advance economy with a representative agent and real uncertainty, modeled by independent, identically distributed endowments. Suppose the central bank fixes the nominal rate of interest. We show that the equilibrium long-run rate of inflation is strictly higher, on almost every path of endowment realizations, than it would be if the endowments were constant. Indeed, we present an explicit formula for the long-run rate of inflation, based on the famous Fisher equation. The Fisher equation says the short-run rate of inflation should equal the nominal rate of interest less the real rate of interest. The long-run Fisher equation for our stochastic economy is similar, but with the rate of inflation replaced by the harmonic mean of the growth rate of money. |
| doi_str_mv | 10.1007/s00199-005-0648-z |
| format | article |
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Consider an infinite horizon cash-in-advance economy with a representative agent and real uncertainty, modeled by independent, identically distributed endowments. Suppose the central bank fixes the nominal rate of interest. We show that the equilibrium long-run rate of inflation is strictly higher, on almost every path of endowment realizations, than it would be if the endowments were constant. Indeed, we present an explicit formula for the long-run rate of inflation, based on the famous Fisher equation. The Fisher equation says the short-run rate of inflation should equal the nominal rate of interest less the real rate of interest. 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| source | EBSCOhost Business Source Ultimate; International Bibliography of the Social Sciences (IBSS); EBSCOhost Econlit with Full Text; JSTOR Archival Journals and Primary Sources Collection; ABI/INFORM Global; Springer Nature |
| subjects | Bank loans Bias Central banks Consumption Economic equilibrium Economic theory Economic uncertainty Economics Endowment Endowments Equilibrium Expenditures Fisher effect Infinity Inflation Inflation rates Interest rates Liquids Mathematical methods Monetary economics Monetary models Prices Studies Uncertainty Utility functions |
| title | The Inflationary Bias of Real Uncertainty and the Harmonic Fisher Equation |
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