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Learning by Disinflating

  • ALINA BARNETT
  • MARTIN ELLISON

Disinflationary episodes are a valuable source of information for economic agents trying to learn about the economy. In this paper we are particularly interested in how policymakers can themselves learn by disinflating. The approach differs from the existing literature, which typically focuses on the learning of private agents during a disinflation. We build a model where both the policymaker and private agents learn, and ask what happens if the policymaker has to disinflate to satisfy a new central bank mandate specifying greater emphasis on inflation stabilisation. In this case, our results show that inflation may fall dramatically before it gradually rises to its new long run level. The potential for inflation to undershoot its long run level during a disinflationary episode suggests that caution should be exercised when assessing the success of any change in the policymaker's mandate. JEL classification: D83, E52, E58 Keywords: Disinflation, Escape Dynamics, Learning, Monetary Policy

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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 45 (2013)
Issue (Month): 4 (06)
Pages: 731-746

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Handle: RePEc:mcb:jmoncb:v:45:y:2013:i:4:p:731-746
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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