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The persistence of inflation and the cost of disinflation

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  • Jeffrey C. Fuhrer

Abstract

How costly would it be in terms of lost output and jobs to lower the inflation rate to zero? One can answer this counterfactual question only in the context of a model that allows us to estimate the effects of pursuing counterfactual monetary policies. The answer to the question can vary widely depending upon the characteristics of the model used to address it.> This article argues that one cannot answer the above question accurately without using a model that properly captures an important feature of the real world: the persistence of inflation. This persistence and the cost of disinflating may arise for several reasons, including the inertia that wage and price contracts impart to the inflation rate, the inertia that slowly adjusting expectations may impart to inflation, or the inertia that imperfect credibility may impart to inflation. The author examines the question using the results of both stylized and fully articulated models. Social Security Reform: Links to Saving, Investment, and Growth. This article reviews the presentations at the conference and the themes that developed from the discussions.

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Bibliographic Info

Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

Volume (Year): (1995)
Issue (Month): Jan ()
Pages: 3-16

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Handle: RePEc:fip:fedbne:y:1995:i:jan:p:3-16

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Keywords: Inflation (Finance);

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Cited by:
  1. Wang, Miao & Wong, M.C. Sunny, 2005. "Learning dynamics in monetary policy: The robustness of an aggressive inflation stabilizing policy," Journal of Macroeconomics, Elsevier, vol. 27(1), pages 143-151, March.
  2. Cecchetti, Stephen G & Rich, Robert W, 2001. "Structural Estimates of the U.S. Sacrifice Ratio," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(4), pages 416-27, October.
  3. Neville Francis & Michael T. Owyang, 2004. "Monetary policy in a Markov-switching VECM: implications for the cost of disinflation and the price puzzle," Working Papers 2003-001, Federal Reserve Bank of St. Louis.
  4. Michael T. Owyang & Howard J. Wall, 2004. "Structural breaks and regional disparities in the transmission of monetary policy," Working Papers 2003-008, Federal Reserve Bank of St. Louis.
  5. Daniel Dias & Carlos Robalo Marques, 2005. "Using Mean Reversion as a Measure of Persistence," Working Papers w200503, Banco de Portugal, Economics and Research Department.
  6. Kozicki, Sharon & Tinsley, P.A., 2005. "What do you expect? Imperfect policy credibility and tests of the expectations hypothesis," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 421-447, March.
  7. Roman Hušek & Tomáš Formánek, 2005. "Estimation of the Czech Republic Sacrifice Ratio for the Transition Period," Prague Economic Papers, University of Economics, Prague, vol. 2005(1), pages 51-63.
  8. Weshah Razzak, 1997. "The inflation-output trade-off: Is the Phillips Curve symmetric? A policy lesson from New Zealand," Reserve Bank of New Zealand Discussion Paper Series G97/2, Reserve Bank of New Zealand.
  9. Yanli LI, Hongfeng PENG & Hongfeng PENG, 2013. "Inflation Persistence in Nine Latin American Countries: Panel SURKSS Test with a Fourier Function," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 132-143, October.
  10. Jean-Jacques Durand & Marilyne Huchet-Bourdon & Julien Licheron, 2008. "Sacrifice ratio dispersion within the Euro Zone: what can be learned about implementing a single monetary policy," Working Papers 157673, Institut National de la Recherche Agronomique, France.
  11. Carlos Humberto Cardona & Adriana Pontón & Eduardo Sarmiento, . "Evidencia sobre las Desinflaciones: Experiencia Internacional," Borradores de Economia 102, Banco de la Republica de Colombia.
  12. Gordon de Brouwer & James O'Regan, 1997. "Evaluating Simple Monetary-policy Rules for Australia," RBA Annual Conference Volume, in: Philip Lowe (ed.), Monetary Policy and Inflation Targeting Reserve Bank of Australia.
  13. Jean-Jacques Durand & Marilyne Huchet-Bourdon & Julien Licheron, 2008. "Sacrifice ratio dispersion within the Euro Zone: what can be learned about implementing a single monetary policy?," International Review of Applied Economics, Taylor & Francis Journals, vol. 22(5), pages 601-621.
  14. Jean-Jacques Durand & Marilyne Huchet-Bourdon & Julien Licheron, 2008. "Sacrifice ratio dispersion within the Euro Zone: what can be learned about implementing a single monetary policy," Working Papers 21402, Institut National de la Recherche Agronomique, France.

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