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Imperfectly Credible Disinflation under Endogenous Time-Dependent Pricing

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  • MARCO BONOMO
  • CARLOS CARVALHO

Abstract

The real effects of an imperfectly credible disinflation depend critically on the extent of price rigidity. We examine this interaction in a model with endogenous time-dependent pricing. Both the endogenous initial degree of price rigidity and changes in the duration of price spells during disinflation are important in explaining the effects of imperfect credibility. We initially consider a setup where the degree of credibility is fixed and then allow agents to update beliefs about the "type" of monetary authority that they face. In both cases, the interaction between endogeneity of pricing behavior and imperfect credibility increases the output costs of disinflation. Copyright (c) 2010 The Ohio State University.

Suggested Citation

  • Marco Bonomo & Carlos Carvalho, 2010. "Imperfectly Credible Disinflation under Endogenous Time-Dependent Pricing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(5), pages 799-831, August.
    • Handle: RePEc:mcb:jmoncb:v:42:y:2010:i:5:p:799-831
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    3. Monteiro, Paulo Klinger, 2009. "First-price auction symmetric equilibria with a general distribution," Games and Economic Behavior, Elsevier, vol. 65(1), pages 256-269, January.
    4. Guimaraes, Bernardo & Mazini, Andre & Prince, Diogo de, 2016. "Time-dependent or State-dependent Pricing? Evidence from Firms' Response to Inflation Shocks," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 36(1), March.
    5. Demery, David, 2012. "State-dependent pricing and the non-neutrality of money," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 933-944.
    6. Cysne, Rubens Penha, 2006. "Income inequality in a job-search model with heterogeneous discount factors: (revised version, forthcoming 2006, Revista Economia)," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 611, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    7. Renato G. Flôres & Maria Paula Fontoura & Rogério Guerra Santos, 2007. "Foreign Direct Investment Spillovers in Portugal: Additional Lessons from a Country Study," The European Journal of Development Research, Taylor and Francis Journals, vol. 19(3), pages 372-390.
    8. Carlos Carvalho & Fernanda Nechio, 2011. "Aggregation and the PPP Puzzle in a Sticky-Price Model," American Economic Review, American Economic Association, vol. 101(6), pages 2391-2424, October.
    9. Marco Bonomo & Marcelo Medeiros & Arnildo Correa, 2011. "Estimating Strategic Complementarity in a State-Dependent Pricing Model," 2011 Meeting Papers 691, Society for Economic Dynamics.
    10. Cysne, Rubens Penha, 2006. "An intra-household approach to the welfare costs of inflation (Revised Version, Forthcoming 2006, Estudos Econômicos)," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 612, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    11. James Yetman, 2007. "Explaining hump-shaped inflation responses to monetary policy shocks," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(6), pages 605-617.
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    13. Hofstetter, Marc, 2010. "Sticky prices and moderate inflation," Economic Modelling, Elsevier, vol. 27(2), pages 535-546, March.
    14. Taylor, J.B., 2016. "The Staying Power of Staggered Wage and Price Setting Models in Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 2009-2042, Elsevier.
    15. James B. Bullard, 2022. "Reflections on the Disinflationary Methods of Poincaré and Thatcher," Speech 94556, Federal Reserve Bank of St. Louis.
    16. Flôres Junior, Renato Galvão & Watanuki, Masakazu, 2006. "Integration options for mercosul - an investigation Uusing the AMIDA Model," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 610, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    17. Carvalho Carlos, 2006. "Heterogeneity in Price Stickiness and the Real Effects of Monetary Shocks," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(3), pages 1-58, December.
    18. Lynne Evans & Anamaria Nicolae, 2010. "Imperfectly-Credible Disinflation of Small Inflations," Working Papers 2010_01, Durham University Business School.
    19. Iana Ferrão de Almeida, 2011. "DesinflaçõesMonetárias sob Heterogeneidade e Regras EndógenasDependentes do Tempo," Anais do XXXVII Encontro Nacional de Economia [Proceedings of the 37th Brazilian Economics Meeting] 51, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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