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Learning by Disinflating

Listed author(s):
  • 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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  1. David Andolfatto & Paul Gomme, 1997. "Monetary policy regimes and beliefs," Discussion Paper / Institute for Empirical Macroeconomics 118, Federal Reserve Bank of Minneapolis.
  2. Christopher J. Erceg and Andrew T. Levin, 2001. "Imperfect Credibility and Inflation Persistence," Computing in Economics and Finance 2001 19, Society for Computational Economics.
  3. Michael D. Bordo & Christopher Erceg & Andrew Levin, 2007. "Three Great American Disinflations," NBER Working Papers 12982, National Bureau of Economic Research, Inc.
  4. Ellison, Martin & Yates, Tony, 2007. "Escaping Nash and Volatile Inflation," CEPR Discussion Papers 6483, C.E.P.R. Discussion Papers.
  5. Marvin Goodfriend & Robert King, 2005. "The Incredible Volcker Disinflation," NBER Working Papers 11562, National Bureau of Economic Research, Inc.
  6. Thomas Sargent & Noah Williams & Tao Zha, 2004. "Shocks and Government Beliefs: The Rise and Fall of American Inflation," NBER Working Papers 10764, National Bureau of Economic Research, Inc.
  7. Timothy Cogley & Riccardo Colacito & Thomas J. Sargent, 2005. "Benefits from U.S. monetary policy experimentation in the days of Samuelson and Solow and Lucas," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  8. Lynne Evans & Anamaria Nicolae, 2010. "The Output Effect of a Transition to Price Stability When Velocity Is Time Varying," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(5), pages 859-878, 08.
  9. Martin Ellison & Tony Yates, 2007. "Escaping Volatile Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(4), pages 981-993, 06.
  10. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, Oxford University Press, vol. 100(4), pages 1169-1189.
  11. Christian Matthes & Argia M. Sbordone & Timothy Cogley, 2011. "Optimal Disinflation Under Learning," 2011 Meeting Papers 74, Society for Economic Dynamics.
  12. Bruce McGough, 2006. "Shocking Escapes," Economic Journal, Royal Economic Society, vol. 116(511), pages 507-528, 04.
  13. Anamaria Nicolae & Charles Nolan, 2004. "The impact of imperfect credibility in a transition to price stability," Money Macro and Finance (MMF) Research Group Conference 2003 72, Money Macro and Finance Research Group.
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  16. repec:fip:fedgsq:y:2007:i:jul10 is not listed on IDEAS
  17. Giorgio Primiceri, 2005. "Why Inflation Rose and Fell: Policymakers' Beliefs and US Postwar Stabilization Policy," NBER Working Papers 11147, National Bureau of Economic Research, Inc.
  18. Frederic S. Mishkin, 2007. "Inflation Dynamics," International Finance, Wiley Blackwell, vol. 10(3), pages 317-334, December.
  19. In-Koo Cho & Noah Williams & Thomas J. Sargent, 2002. "Escaping Nash Inflation," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 1-40.
  20. Cho, In-Koo & Kasa, Kenneth, 2008. "Learning Dynamics And Endogenous Currency Crises," Macroeconomic Dynamics, Cambridge University Press, vol. 12(02), pages 257-285, April.
  21. Peter N. Ireland, 1995. "Optimal disinflationary paths," Working Paper 95-01, Federal Reserve Bank of Richmond.
  22. Ben S. Bernanke, 2007. "Inflation expectations and inflation forecasting," Speech 306, Board of Governors of the Federal Reserve System (U.S.).
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