Cardiff University | Prifysgol Caerdydd ORCA
Online Research @ Cardiff 
WelshClear Cookie - decide language by browser settings

UK macroeconomic volatility and the welfare costs of inflation

Polito, Vito and Spencer, Peter 2011. UK macroeconomic volatility and the welfare costs of inflation. [Working Paper]. Cardiff Economics Working Papers, Cardiff: Cardiff University.

[img]
Preview
PDF - Published Version
Download (822kB) | Preview

Abstract

This paper explores the implications of time varying volatility for optimal monetary policy and the measurement of welfare costs. We show how macroeconomic models with linear and quadratic state dependence in their variance structure can be used for the analysis of optimal policy within the framework of an optimal linear regulator problem. We use this framework to study optimal monetary policy under inflation conditional volatility and find that the quadratic component of the variance makes policy more responsive to inflation shocks in the same way that an increase in the welfare weight attached to inflation does, while the linear component reduces the steady state rate of inflation. Empirical results for the period 1979-2010 underline the statistical significance of inflation-dependent UK macroeconomic volatility. Analysis of the welfare losses associated with inflation and macroeconomic volatility shows that the conventional homoskedastic model seriously underestimates both the welfare costs of inflation and the potential gains from policy optimization.

Item Type: Monograph (Working Paper)
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Subjects: H Social Sciences > HB Economic Theory
Publisher: Cardiff University
Date of First Compliant Deposit: 30 March 2016
Last Modified: 08 May 2019 02:34
URI: http://orca-mwe.cf.ac.uk/id/eprint/77917

Actions (repository staff only)

Edit Item Edit Item

Downloads

Downloads per month over past year

View more statistics