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Expectations, learning and the costs of disinflation: experiments using the FRB/US model

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Abstract

The costs of disinflation are explored using the Board's new sticky-price rational expectations macroeconometric model of the U.S. economy, FRB/US. The model nests both model consistent and `restricted-information rational' expectations. Monetary policy is governed by interest-rate reaction functions of which two are considered: the well-known Taylor rule and another rule that is more aggressive and richer in its specification, estimated using data for the last 15 years. Agents are required to learn of shifts of the inflation target using linear updating rules. The simulated costs of disinflation are compared with other estimates of sacrifice ratios.

Suggested Citation

  • Antulio N. Bomfim & Robert J. Tetlow & Peter Von zur Muehlen & John Williams, 1997. "Expectations, learning and the costs of disinflation: experiments using the FRB/US model," Finance and Economics Discussion Series 1997-42, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:1997-42
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    References listed on IDEAS

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    1. John B. Taylor, 1994. "The inflation/output variability trade-off revisited," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 38, pages 21-24.
    2. Peter A. Tinsley, 1993. "Fitting both data and theories: polynomial adjustment costs and error- correction decision rules," Finance and Economics Discussion Series 93-21, Board of Governors of the Federal Reserve System (U.S.).
    3. Peter A. Tinsley, 1971. "On ramps, turnpikes, and distributed lag approximations of optimal intertemporal adjustment," Special Studies Papers 15, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:

    1. Orphanides, Athanasios & Williams, John C., 2005. "The decline of activist stabilization policy: Natural rate misperceptions, learning, and expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 29(11), pages 1927-1950, November.
    2. Erceg, Christopher J. & Levin, Andrew T., 2003. "Imperfect credibility and inflation persistence," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 915-944, May.
    3. Michael T. Kiley, 2008. "Monetary policy actions and long-run inflation expectations," Finance and Economics Discussion Series 2008-03, Board of Governors of the Federal Reserve System (U.S.).
    4. Chan Guk Huh & Kevin J. Lansing, 1998. "Federal Reserve credibility and inflation scares," Economic Review, Federal Reserve Bank of San Francisco, pages 3-16.
    5. Bomfim, Antulio N & Rudebusch, Glenn D, 2000. "Opportunistic and Deliberate Disinflation under Imperfect Credibility," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 707-721, November.
    6. Huh, Chan G. & Lansing, Kevin J., 2000. "Expectations, credibility, and disinflation in a small macroeconomic model," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 51-86.
    7. 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.
    8. Athanasios Orphanides & John Williams, 2004. "Imperfect Knowledge, Inflation Expectations, and Monetary Policy," NBER Chapters, in: The Inflation-Targeting Debate, National Bureau of Economic Research, Inc.
    9. Raf Wouters & Michel Dombrecht, 2000. "Model-based inflation forecasts and monetary policy rules," Working Paper Research 01, National Bank of Belgium.
    10. David L. Reifschneider & John C. Williams, 2000. "Three lessons for monetary policy in a low-inflation era," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 936-978.
    11. René Lalonde, 2005. "Endogenous Central Bank Credibility in a Small Forward-Looking Model of the U.S. Economy," Staff Working Papers 05-16, Bank of Canada.

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    Inflation (Finance); Econometric models;

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