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Price-level determinacy and monetary policy in a model with money and trend inflation

Published online by Cambridge University Press:  20 January 2023

Irfan A. Qureshi
Irfan A. Qureshi*
Affiliation:
Asian Development Bank, Metro Manila, Philippines
*
Email: iqureshi@adb.org.
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Abstract

I examine how money and trend inflation shaped US macroeconomic dynamics during the Great Inflation. I develop a business cycle model with positive trend inflation where money is allowed (but not required) to play a role in determining the equilibrium values of inflation and output through non-separable utility, adjustment costs for holding real balances, and the monetary policy reaction function. The Taylor principle changes in this environment. Targeting money guarantees price determinacy even with trend inflation, but these results are sensitive to the inclusion of non-separability and portfolio adjustment costs. The framework is combined with Greenbook data that detect the role of money in the policy reaction function. The response to money was likely not sufficiently strong to complement the reaction to inflation and counteract the high trend inflation observed during the pre-Volcker period, which most likely led to price indeterminacy.

Keywords

Price determinacytrend inflationmonetary policymoney aggregates
Type
Articles
Information
Macroeconomic Dynamics , Volume 27 , Issue 8 , December 2023 , pp. 2165 - 2190
Copyright
© The Author(s), 2023. Published by Cambridge University Press

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Footnotes

*

I am grateful to William A. Barnett (Editor), two anonymous referees, and Ghufran Ahmed for helpful comments and suggestions. The views expressed in this paper are those of the author and should not be reported as representing the views of the Asian Development Bank. This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.

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