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Inflation and Its Variation: An Alternative Explanation

  • Author(s): Geraats, Petra M.
  • et al.
Abstract

This paper introduces a general objective function for monetary policy that abandons certainty equivalence and features 'prudence'. It provides an alternative explanation for the positive relation between the level and variability of inflation, both across countries and over time. In particular, the model predicts that high (low) inflation tends to be more variable (stable) over time.

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