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Learning by Disinflating

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  • ALINA BARNETT
  • MARTIN ELLISON

Abstract

Disinflationary episodes are a valuable source of information for economic agents trying to learn about the economy.� This paper is especially interested in how a policymaker can themselves learn by disinflating.� The approach differs from the existing literature, which typically focuses on the learning of private agents during a disinflation.� We build a model where both the policymaker and private agents learn, and ask what happens if the poicymaker has to disinflate to satisfy a new central bank mandate specifying greater emphasis on inflation stabilisation.� In this case, our results show that inflation may fall dramatically before it gradually rises to its new long run level.� The potential for inflation to undershoot its long run level during a disinflationary episode suggests that caution should be exercised when assessing the success of any change in the policymaker's mandate.

(This abstract was borrowed from another version of this item.)

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Bibliographic Info

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

Volume (Year): 45 (2013)
Issue (Month): 4 (06)
Pages: 731-746

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Handle: RePEc:mcb:jmoncb:v:45:y:2013:i:4:p:731-746

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

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References

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  1. Christian Matthes & Argia M. Sbordone & Timothy Cogley, 2011. "Optimal Disinflation Under Learning," 2011 Meeting Papers 74, Society for Economic Dynamics.
  2. Tillmann, Peter, 2010. "The Fed's perceived Phillips curve: Evidence from individual FOMC forecasts," Journal of Macroeconomics, Elsevier, vol. 32(4), pages 1008-1013, December.
  3. Cho, In-Koo & Kasa, Kenneth, 2008. "Learning Dynamics And Endogenous Currency Crises," Macroeconomic Dynamics, Cambridge University Press, vol. 12(02), pages 257-285, April.
  4. Marvin Goodfriend & Robert King, 2005. "The Incredible Volcker Disinflation," NBER Working Papers 11562, National Bureau of Economic Research, Inc.
  5. Anamaria Nicolae & Charles Nolan, 2004. "The Impact Of Imperfect Credibility In A Transition To Price Stability," Royal Economic Society Annual Conference 2004 102, Royal Economic Society.
  6. Bordo, Michael D. & Erceg, Christopher & Levin, Andrew & Michaels, Ryan, 2006. "Three great American disinflations," CFS Working Paper Series 2007/05, Center for Financial Studies (CFS).
  7. Thomas Sargent & Noah Williams & Tao Zha, 2004. "Shocks and Government Beliefs: The Rise and Fall of American Inflation," NBER Working Papers 10764, National Bureau of Economic Research, Inc.
  8. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
  9. David Andolfatto & Paul Gomme, 1997. "Monetary policy regimes and beliefs," Discussion Paper / Institute for Empirical Macroeconomics 118, Federal Reserve Bank of Minneapolis.
  10. Martin Ellison & Tony Yates, 2007. "Escaping Volatile Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(4), pages 981-993, 06.
  11. In-Koo Cho & Noah Williams & Thomas J. Sargent, 2002. "Escaping Nash Inflation," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 1-40.
  12. Giorgio Primiceri, 2005. "Why Inflation Rose and Fell: Policymakers' Beliefs and US Postwar Stabilization Policy," NBER Working Papers 11147, National Bureau of Economic Research, Inc.
  13. Timothy Cogley & Riccardo Colacito & Thomas J. Sargent, 2005. "Benefits from U.S. monetary policy experimentation in the days of Samuelson and Solow and Lucas," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  14. Lynne Evans & Anamaria Nicolae, 2010. "The Output Effect of a Transition to Price Stability When Velocity Is Time Varying," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(5), pages 859-878, 08.
  15. Guido Ascari & Tiziano Ropele, 2012. "Sacrifice Ratio in a Medium‐Scale New Keynesian Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 457-467, 03.
  16. Bruce McGough, 2003. "Shocking Escapes," Computing in Economics and Finance 2003 294, Society for Computational Economics.
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Cited by:
  1. Christian Matthes & Francesca Rondina, 2012. "Two-sided Learning in New Keynesian Models: Dynamics, (Lack of) Convergence and the Value of Information," Working Papers 661, Barcelona Graduate School of Economics.
  2. Ascari, Guido & Ropele, Tiziano, 2013. "Disinflation effects in a medium-scale New Keynesian model: Money supply rule versus interest rate rule," European Economic Review, Elsevier, vol. 61(C), pages 77-100.
  3. 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.

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