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Title: Essays on trend inflation, nominal rigidity, and optimal monetary policy
Author: Zhang, Xuanyang
ISNI:       0000 0004 7652 4513
Awarding Body: Cardiff University
Current Institution: Cardiff University
Date of Award: 2018
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To some extent, the common assumption of zero-inflation steady state in modern macro models is theoretically flawed, empirically unfounded, and practically inconsistent. I build a medium-scale Generalised New Keynesian (GNK) model based on non-zero inflation steady state in order to study inflation persistence and the effect of trend inflation. This GNK model exhibits much more dynamics than a standard NK model in several ways: a) NKPC becomes flatter and more forward looking as trend inflation increases; b) price dispersion introduces huge inertia into the model as trend rises; c) backward looking feature is also present in the market wage equation, even though optimal reset wage is more forward looking. This model is then estimated using a Bayesian technique with quarterly US data from 1970 to 2017. The estimation results show the model is capable of capturing macro evidence in the postwar US, and annual trend inflation is estimated to be around 3 percent. Simulations show trend inflation does not generate significant alterations to macroeconomic dynamics under a moderately high degree of indexation, and this is consistent with the literature. However, once indexation is switched off, trend inflation alters the model dynamics in a very significant way: 1) in general, output and inflation fluctuate much more heavily with higher trend inflation after most shocks; 2) inflation exhibits a hump-shaped response with four percent trend inflation or above after a transitory monetary policy shock; 3) inflation reacts less on impact but becomes much more persistent with higher trend inflation after a monetary shock. The welfare loss, timing of the maximum effect and inflation persistence after a monetary policy shock provide very important implications to both economists and policy-makers
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available
Keywords: HB Economic Theory ; HC Economic History and Conditions