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A Cold-Turkey versus a Gradualist Approach in a Menu Cost Model

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  • Loh Sanguck

    (Ajou University)

Abstract

Disinflations typically lead to recessions in actual economies. A classical policy issue is the choice between a cold-turkey and a gradualist approach to minimize the output loss associated with a period of disinflation. This paper explores which policy option is less costly in terms of foregone output through a menu cost model in which the credibility of government policies is the decisive factor in determining the appropriate speed of disinflation. It shows that, in the event of non-credibility, cold-turkey disinflation minimizes foregone output, whereas full credibility favors a gradualist approach.

Suggested Citation

  • Loh Sanguck, 2002. "A Cold-Turkey versus a Gradualist Approach in a Menu Cost Model," The B.E. Journal of Macroeconomics, De Gruyter, vol. 2(1), pages 1-19, March.
    • Handle: RePEc:bpj:bejmac:v:topics.2:y:2002:i:1:n:1
    DOI: 10.2202/1534-5998.1034
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    Cited by:

    1. Giamattei, Marcus, 2015. "Cold Turkey vs. Gradualism - Evidence on Disinflation Strategies from a Laboratory Experiment," Passauer Diskussionspapiere, Volkswirtschaftliche Reihe V-67-15, University of Passau, Faculty of Business and Economics.
    2. Marcus Giamattei, 2022. "Can Cold Turkey Reduce Inflation Inertia? Evidence on Disinflation and Level‐k Thinking from a Laboratory Experiment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(8), pages 2477-2517, December.

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