Fed paper examines costs of trend inflation variance

A working paper published by the Federal Reserve yesterday says volatile trend inflation reduces the average level of consumption, but the overall welfare cost is "modest".

The author, Taisuke Nakata, studies the implications of exogenous variations in trend inflation for the levels of welfare in a modelled New Keynesian economy.

As trend inflation increases, the consumption and leisure levels in the economy decline, and vice versa. However, Nakata finds, an inflation increase has a greater impact than an inflation decrease. Consequently, greater volatility in trend inflation leads to a reduction in the average levels of consumption – though the paper adds that the welfare cost is modest.

To read the paper in full, click here.