This paper uses a stylized New Keynesian Model to examine alternative disinflation strategies under optimal monetary policy conditions with bounded rationality. The model is calibrated for Chile and presents some policy tradeoffs not necessarily captured under the full rational expectations solution. Under rational expectations and in the absence of nominal inertia, the optimal policy suggests an ambitious disinflation horizon as expectations of inflation are revised immediately. However, under full adaptive learning, a distinct policy trade-off emerges between ambition and gradualism. We also find that when expectations exhibit a degree of imperfect knowledge it is optimal to increase the strength of the policy response relative to that of the perfect knowledge solution.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by National Institute of Economic and Social Research in its series NIESR Discussion Papers with number
308.