Does Lower Inflation Imply Lower Price Uncertainty?

Inflation Risk and Optimal Monetary Policy

This paper shows that the optimal monetary policies recommended by New Keynesian models still imply a large amount of inflation risk. We calculate the term structure of inflation uncertainty in New Keynesian models when the monetary authority adopts the optimal policy. When the monetary policy rules are modified to include some weight on a price path, the economy achieves equilibria with substa...

Price-Level Targeting and Risk Management in a Low-Inflation Economy

With inflation and policy interest rates at historically low levels, policymakers show great concern about "downside tail risks" due to a zero lower bound on nominal interest rates. Low probability or tail events, such as sustained deflation or recession, are disruptive for the economy and can be difficult to resolve. This paper shows that price-level targeting mitigates downside tail risks res...

Does Higher Inflation Lead to More Inflation Uncertainty? (The Case Of Iran)

On Modeling the Effects of Inflation Shocks

A popular model in the literature postulates an interest rate rule, a NAIRU price equation, and an aggregate demand equation in which aggregate demand depends on the real interest rate. In this model a positive inflation shock with the nominal interest rate held constant is explosive because it increases aggregate demand (because the real interest rate is lower), which increases inflation throu...

The Impact of Inflation and Uncertainty on the Optimum Markup Set by Firms *

This paper argues that non-colluding price setting firms in an uncertain economic environment will set a ‘low’ markup relative to the profit maximising markup if; (a) they are uncertain of the profit maximising markup; and (b) the cost to firms of mistakenly setting a ‘high’ markup is greater than if they mistakenly set a ‘low’ markup. Furthermore, firms will set a lower markup the higher is th...