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Why Speed Doesn’t Kill: Learning to Believe in Disinflation

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  • Eric Schaling
  • Marco Hoeberichts

Abstract

Central bankers generally prefer to reduce inflation gradually. We show that a central bank may try to convince the private sector of its commitment to price stability by choosing to reduce inflation quickly. We call this "teaching by doing". We find that allowing for teaching by doing effects always speeds up the disinflation and leads to lower inflation persistence. So, we clarify why "speed" in the disinflation process does not necessarily "kill" in the sense of creating large output losses. This result also holds in an environment where private agents learn about the central bank’s inflation target using a constant gain algorithm.

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Bibliographic Info

Paper provided by Economic Research Southern Africa in its series Working Papers with number 164.

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Length: 20 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:rza:wpaper:164

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Related research

Keywords: learning; disinflation; credibility; sacrifice ratio;

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Cited by:
  1. Schaling, E., 2003. "Learning, Inflation Reduction and Optimal Monetary Policy," Discussion Paper, Tilburg University, Center for Economic Research 2003-74, Tilburg University, Center for Economic Research.
  2. Eric Schaling & Marco Hoeberichts, 2010. "Why Speed Doesn’t Kill: Learning to Believe in Disinflation," De Economist, Springer, Springer, vol. 158(1), pages 23-42, April.

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