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Optimal disinflationary paths

  • Peter N. Ireland

This paper characterizes optimal monetary policy in the context of a general equilibrium model with optimizing agents and staggered price setting. Starting from a steady state with positive inflation, a rapid disinflation is desirable when announcements of future monetary policy are fully credible. Disinflationary policy yields substantial losses in output and employment when the monetary authority lacks credibility; nevertheless, the benefits of disinflation still exceed the costs. Disinflation often fails to be welfare-improving, however, when lost seignorage revenues must be replaced using other distortionary taxes.

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Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 95-01.

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Date of creation: 1995
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Handle: RePEc:fip:fedrwp:95-01
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  1. Robert P. Black, 1990. "In support of price stability," Economic Review, Federal Reserve Bank of Richmond, issue Jan, pages 3-6.
  2. Lee E. Ohanian & Alan C. Stockman, 1994. "Short-run effects on money when some prices are sticky," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 1-24.
  3. Thomas F. Cooley & Gary D. Hansen, 1987. "The Inflation Tax in a Real Business Cycle Model," UCLA Economics Working Papers 496, UCLA Department of Economics.
  4. Cho, J.O. & Cooley, T.F., 1991. "The Business Cycle with Nominal Contracts," RCER Working Papers 260, University of Rochester - Center for Economic Research (RCER).
  5. John B. Taylor, 1982. "Union Wage Settlements During a Disinflation," NBER Working Papers 0985, National Bureau of Economic Research, Inc.
  6. W. Lee Hoskins, 1991. "Defending zero inflation: all for naught," Economic Commentary, Federal Reserve Bank of Cleveland, issue Apr.
  7. Thomas F. Cooley & Gary D. Hansen, 1991. "The welfare costs of moderate inflations," Proceedings, Federal Reserve Bank of Cleveland, pages 483-518.
  8. S. Rao Aiyagari, 1990. "Deflating the case for zero inflation," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-11.
  9. Robert G. King, 1991. "Money and business cycles," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  10. Greenwood, Jeremy & Huffman, Gregory W., 1987. "A dynamic equilibrium model of inflation and unemployment," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 203-228, March.
  11. Ball, Laurence, 1994. "Credible Disinflation with Staggered Price-Setting," American Economic Review, American Economic Association, vol. 84(1), pages 282-89, March.
  12. W. Lee Hoskins, 1991. "Defending zero inflation: all for naught," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 16-20.
  13. Olivier J. Blanchard, 1982. "Price Asynchronization and Price Level Inertia," NBER Working Papers 0900, National Bureau of Economic Research, Inc.
  14. Danziger, Leif, 1988. "Costs of Price Adjustment and the Welfare Economics of Inflation and Disinflation," American Economic Review, American Economic Association, vol. 78(4), pages 633-46, September.
  15. Edmund Phelps, 1978. "Disinflation without recession: Adaptive guideposts and monetary policy," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 114(4), pages 783-809, December.
  16. Stanley Fischer, 1986. "Contracts, Credibility, and Disinflation," NBER Working Papers 1339, National Bureau of Economic Research, Inc.
  17. anonymous, 1987. "Comment on proposed actions," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Apr, pages 296-297.
  18. Lucas, Deborah, 1999. "Price and interest rate dynamics induced by multiperiod contracts," The North American Journal of Economics and Finance, Elsevier, vol. 10(2), pages 315-338.
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