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Can Cold Turkey Reduce Inflation Inertia? Evidence on Disinflation and Level‐k Thinking from a Laboratory Experiment

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  • MARCUS GIAMATTEI

Abstract

It is widely believed that inflation inertia varies with the policy pursued. In a novel experiment, price setters determine inflation rates and react to a central bank's indicator, which is implemented exogenously either as cold turkey or gradual disinflation. In a third treatment, subjects in the role of a central banker set the indicator endogenously, potentially reducing inertia by signaling to be a tough central banker. I find inertia to be structurally stable and invariant to policies. The data can be organized by a model of level‐k$k$ thinking, which shows that cold turkey improves only a few subjects' adjustment while leaving many behind.

Suggested Citation

  • Marcus Giamattei, 2022. "Can Cold Turkey Reduce Inflation Inertia? Evidence on Disinflation and Level‐k Thinking from a Laboratory Experiment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(8), pages 2477-2517, December.
    • Handle: RePEc:wly:jmoncb:v:54:y:2022:i:8:p:2477-2517
    DOI: 10.1111/jmcb.12904
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