We develop a theoretical framework to account for the observed instability of the link between inflation and fiscal … bank that has full control over inflation. When policy makers deviate from this Virtuous regime, agents conduct Bayesian … pessimistic about a prompt return to the Virtuous regime and inflation starts drifting in response to a fiscal imbalance. Shocks …

We study the effects of inflation in models with various trading frictions. The framework is related to recent search … model, under posting the cost of inflation is similar to previous estimates, around 1% of consumption. Under bargaining, it … is considerably bigger, between 3% and 5%. Under price taking, the cost of inflation depends on parameters, but tends to …

, we focus not only on real activity, which has received most attention to date, but also on inflation and its interaction … aspects concern a real activity decline that was unusually long but less unusually deep, and an inflation decline that was … unusually deep but brief; and (3) its real activity and inflation interactions were strongly positive, consistent with an …