For simplicity, the inflation rate, the money growth rate, and the output growth rate are assumed to be zero in the steady-state.
But, as soon as the war ended, social unrest spread rapidly because of fierce inflation and other factors.
An interesting question is whether an inflation threshold, for example, of 10 percent is significantly different from a threshold of 8 percent or 15 percent.
Lower inflation rates not only lead to clearer pricing signals and better investment decisions by economic agents, but also protect fixed income earners.
The positive and partly delayed responses of income and inflation are plausible.
Figure 3 shows that the optimal volatility of inflation decreases when the elasticity of demand increases (the markup decreases).
In the long run, stocks are considered a partial hedge for inflation risk.
Note that all variables except for the interest and inflation rates are in logarithms and refer to deviations from some exogenous equilibrium (growth path).
