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Escaping Volatile Inflation

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  • MARTIN ELLISON
  • TONY YATES

Abstract

Why has inflation been so stable in developed economies since the early 1990s? In this paper, we answer that the United States and other countries may have escaped from a volatile inflation equilibrium. Our argument builds on the story proposed by Tom Sargent in "The Conquest of American Inflation", where the fall in inflation in the 1980s was attributed to changing government beliefs. To explain the escape in inflation volatility, we unwind one of Sargent's simplifications and allow the government to react to some of the shocks in the economy. In this case, when government beliefs turned against the Phillips curve in the 1980s they not only led to an escape from high inflation, but also stopped government using changes in inflation to offset shocks. Inflation and inflation volatility therefore escaped in tandem. Our analysis also sheds some light on why the escape in inflation occurred at the time it did. Copyright 2007 The Ohio State University.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 39 (2007)
Issue (Month): 4 (06)
Pages: 981-993

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Handle: RePEc:mcb:jmoncb:v:39:y:2007:i:4:p:981-993

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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Cited by:
  1. Evans, George W & Honkapohja, Seppo, 2011. "Learning as a rational foundation for macroeconomics and finance," Research Discussion Papers 8/2011, Bank of Finland.
  2. Rhys Bidder & Kalin Nikolov & Tony Yates, . " Self-confirming Inflation Persistence," CDMA Conference Paper Series 0908, Centre for Dynamic Macroeconomic Analysis.
  3. George W. Evans & Seppo Honkapohja, 2008. "Expectations, Learning and Monetary Policy: An Overview of Recent Research," CDMA Working Paper Series 200802, Centre for Dynamic Macroeconomic Analysis.
  4. Evans, George W. & Honkapohja, Seppo & Mitra, Kaushik, 2012. "Policy Change and Learning in the RBC Model," CEPR Discussion Papers 8892, C.E.P.R. Discussion Papers.
  5. James B. Bullard, 2006. "The learnability criterion and monetary policy," Review, Federal Reserve Bank of St. Louis, issue May, pages 203-217.
  6. Kolyuzhnov, Dmitri & Bogomolova, Anna & Slobodyan, Sergey, 2014. "Escape dynamics: A continuous-time approximation," Journal of Economic Dynamics and Control, Elsevier, vol. 38(C), pages 161-183.
  7. Barnett, Alina & Ellison, Martin, 2012. "Learning by disinflating," Research Discussion Papers 10/2012, Bank of Finland.

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