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Optimal disinflationary paths

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  • Ireland, Peter N.

Abstract

This paper characterizes optimal monetary policy in the context of a general equilibrium model with optimizing agents and staggered price setting. Starting from a steady state with positive inflation, a rapid disinflation is desirable when announcements of future monetary policy are fully credible. Disinflationary policy yields substantial losses in output and employment when the monetary authority lacks credibility; nevertheless, the benefits of disinflation still exceed the costs. Disinflation often fails to be welfare-improving, however, when lost seignorage revenues must be replaced using other distortionary taxes.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 19 (1995)
Issue (Month): 8 (November)
Pages: 1429-1448

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Handle: RePEc:eee:dyncon:v:19:y:1995:i:8:p:1429-1448

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  1. W. Lee Hoskins, 1991. "Defending zero inflation: all for naught," Economic Commentary, Federal Reserve Bank of Cleveland, issue Apr.
  2. Edmund Phelps, 1978. "Disinflation without recession: Adaptive guideposts and monetary policy," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 114(4), pages 783-809, December.
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  5. Stanley Fischer, 1986. "Contracts, Credibility, and Disinflation," NBER Working Papers 1339, National Bureau of Economic Research, Inc.
  6. Robert P. Black, 1990. "In support of price stability," Economic Review, Federal Reserve Bank of Richmond, issue Jan, pages 3-6.
  7. Cooley, T.F. & Hansen, G.D., 1988. "The Inflation Tax In A Real Business Cycle Model," RCER Working Papers 155, University of Rochester - Center for Economic Research (RCER).
  8. John B. Taylor, 1982. "Union Wage Settlements During a Disinflation," NBER Working Papers 0985, National Bureau of Economic Research, Inc.
  9. Cooley, T.F. & Hansen, G.D., 1991. "The Welfare Costs of Moderate Inflations," Papers 90-04, Rochester, Business - General.
  10. Danziger, Leif, 1988. "Costs of Price Adjustment and the Welfare Economics of Inflation and Disinflation," American Economic Review, American Economic Association, vol. 78(4), pages 633-46, September.
  11. Ball, Laurence, 1994. "Credible Disinflation with Staggered Price-Setting," American Economic Review, American Economic Association, vol. 84(1), pages 282-89, March.
  12. anonymous, 1987. "Comment on proposed actions," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Apr, pages 296-297.
  13. Robert G. King, 1991. "Money and business cycles," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  14. S. Rao Aiyagari, 1990. "Deflating the case for zero inflation," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-11.
  15. Lucas, Deborah, 1999. "Price and interest rate dynamics induced by multiperiod contracts," The North American Journal of Economics and Finance, Elsevier, vol. 10(2), pages 315-338.
  16. Lee E. Ohanian & Alan C. Stockman, 1994. "Short-run effects on money when some prices are sticky," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 1-24.
  17. W. Lee Hoskins, 1991. "Defending zero inflation: all for naught," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 16-20.
  18. Greenwood, Jeremy & Huffman, Gregory W., 1987. "A dynamic equilibrium model of inflation and unemployment," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 203-228, March.
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