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The Inflation Tax, Variable Time Preference and the Business Cycle

Lahiri, Radhika (2002) The Inflation Tax, Variable Time Preference and the Business Cycle. Macroeconomic Dynamics, 6, pp. 496-522.

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Abstract

This paper investigates the impact of anticipated inflation on features of the business cycle in the presence of recursive but intertemporally dependent tastes. Intertemporal dependence is induced by the presence of a variable or endogenous individual rate of time preference. Quantitative experiments indicate that variability in the rate of time preference can enhance the contribution of monetary shocks to the fluctuations of real variables. Another implication of the variable-time-preference model is that, unlike the fixed time preference model, the business cycle features in high inflation and low inflation economies can be very different. The contribution of monetary shocks to fluctuations increases partly because endogenous time preference accentuates inflation-tax effects, which are already present in the standard framework because of the presence of cash-in-advance constraints. The change in the relative role of monetary shocks is also related to how variable time preference alters the effects of technology shocks, which can be quantitatively or qualitatively different in comparison to the standard model, depending on the parameters of the model.

Impact and interest:

3 citations in Scopus
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2 citations in Web of Science®

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107 since deposited on 21 Jan 2008
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ID Code: 12107
Item Type: Journal Article
DOI: 10.1017/S1365100501010021
ISSN: 1365-1005
Subjects: Australian and New Zealand Standard Research Classification > ECONOMICS (140000)
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Copyright Owner: Copyright 2002 Cambridge University Press
Copyright Statement: Reproduced in accordance with the copyright policy of the publisher.
Deposited On: 21 Jan 2008
Last Modified: 05 Jan 2011 23:34

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