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The Dynamic Effects of Disinflation Policies

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  • Collard , F.
  • Fève, P.
  • Matheron, J.

Abstract

This paper investigates the effects of disinflation policies on key macroeconomic variables. Using postwar US data and episode techniques, we identify disinflation shocks as shocks that drive the inflation rate to a lower level in the long-run. We find that in the immediate aftermath of a disinflation policy, the economy enters in a persistent recession. The inflation rate increases above its long-run level and exhibits a positive hump-shaped response. A similar pattern is found for the nominal interest rate, which responds even more strongly in the short-run. We then show that the standard new Keynesian model fails to account for macroeconomic dynamics in disinflationary times. On the contrary a deep habit version of the model successfully accounts for the effects of disinflation policies.

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Bibliographic Info

Paper provided by Banque de France in its series Working papers with number 190.

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Length: 54 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:bfr:banfra:190

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Postal: Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS
Web page: http://www.banque-france.fr/
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Keywords: Disinflation policies ; Deep Habits ; New Keynesian Models.;

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References

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  1. Matthew D. Shapiro, 1993. "Federal Reserve Policy: Cause and Effect," NBER Working Papers 4342, National Bureau of Economic Research, Inc.
  2. Beaudry, Paul & Guay, Alain, 1996. "What do interest rates reveal about the functioning of real business cycle models?," Journal of Economic Dynamics and Control, Elsevier, vol. 20(9-10), pages 1661-1682.
  3. Michael Owyang & Garey Ramey, 2003. "Regime switching and monetary policy measurement," Working Papers 2001-002, Federal Reserve Bank of St. Louis.
  4. David Altig & Lawrence J. Christiano & Martin Eichenbaum & Jesper Linde, 2004. "Firm-specific capital, nominal rigidities and the business cycle," Working Paper Series WP-05-01, Federal Reserve Bank of Chicago.
  5. Leeper, Eric M., 1997. "Narrative and VAR approaches to monetary policy: Common identification problems," Journal of Monetary Economics, Elsevier, vol. 40(3), pages 641-657, December.
  6. Stephen D. Oliner & Glenn D. Rudebusch, 1994. "Is there a broad credit channel for monetary policy?," Working Paper Series / Economic Activity Section 146, Board of Governors of the Federal Reserve System (U.S.).
  7. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
  8. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148 Elsevier.
  9. Burnside, Craig & Eichenbaum, Martin & Fisher, Jonas D. M., 2004. "Fiscal shocks and their consequences," Journal of Economic Theory, Elsevier, vol. 115(1), pages 89-117, March.
  10. Morten Ravn & Stephanie Schmitt-Grohé & Mart�n Uribe, 2006. "Deep Habits," Review of Economic Studies, Oxford University Press, vol. 73(1), pages 195-218.
  11. Bullard, James & Keating, John W., 1995. "The long-run relationship between inflation and output in postwar economies," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 477-496, December.
  12. Laurence Ball, 1993. "What Determines the Sacrifice Ratio?," NBER Working Papers 4306, National Bureau of Economic Research, Inc.
  13. Kashyap, Anil K & Stein, Jeremy C & Wilcox, David W, 1993. "Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance," American Economic Review, American Economic Association, vol. 83(1), pages 78-98, March.
  14. N. Gregory Mankiw, 1994. "Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number greg94-1, May.
  15. Lawrence J. Christiano & Jonas D. M. Fisher, 2003. "Stock Market and Investment Goods Prices: Implications for Macroeconomics," NBER Working Papers 10031, National Bureau of Economic Research, Inc.
  16. Francis, Neville & Owyang, Michael T., 2005. "Monetary Policy in a Markov-Switching Vector Error-Correction Model: Implications for the Cost of Disinflation and the Price Puzzle," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 305-313, July.
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Citations

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Cited by:
  1. 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.
  2. Guido Ascari & Tiziano Ropele, 2009. "Disinflation in a DSGE Perspective: Sacrifice Ratio or Welfare Gain Ratio?," Kiel Working Papers 1499, Kiel Institute for the World Economy.
  3. Hernando Vargas, & Yanneth Rocío Betancourt,, 2010. "Fiscal Policy Restrictions on Inflation Targeting: A Political Economy Approach," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE.

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