Why Speed Doesnâ€™t Kill: Learning to Believe in Disinflation
AbstractCentral 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 bankâ€™s inflation target using a constant gain algorithm.
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Bibliographic InfoPaper provided by Economic Research Southern Africa in its series Working Papers with number 164.
Length: 20 pages
Date of creation: 2010
Date of revision:
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learning; disinflation; credibility; sacrifice ratio;
Find related papers by JEL classification:
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
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- Eric Schaling & Marco Hoeberichts, 2010. "Why Speed Doesn’t Kill: Learning to Believe in Disinflation," De Economist, Springer, vol. 158(1), pages 23-42, April.
- Schaling, E., 2003. "Learning, Inflation Reduction and Optimal Monetary Policy," Discussion Paper 2003-74, Tilburg University, Center for Economic Research.
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