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Ambition versus Gradualism in Disinflation Horizons under Bounded Rationality: The Case of Chile

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  • Ali Al-Eyd

Abstract

This paper uses a stylized New Keynesian Model to examine alternative disinflation strategies under optimal monetary policy conditions with bounded rationality. The model is calibrated for Chile and presents some policy tradeoffs not necessarily captured under the full rational expectations solution. Under rational expectations and in the absence of nominal inertia, the optimal policy suggests an ambitious disinflation horizon as expectations of inflation are revised immediately. However, under full adaptive learning, a distinct policy trade-off emerges between ambition and gradualism. We also find that when expectations exhibit a degree of imperfect knowledge it is optimal to increase the strength of the policy response relative to that of the perfect knowledge solution.

Suggested Citation

  • Ali Al-Eyd, 2008. "Ambition versus Gradualism in Disinflation Horizons under Bounded Rationality: The Case of Chile," National Institute of Economic and Social Research (NIESR) Discussion Papers 308, National Institute of Economic and Social Research.
    • Handle: RePEc:nsr:niesrd:308
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    Cited by:

    1. Giamattei, Marcus, 2015. "Cold Turkey vs. Gradualism - Evidence on Disinflation Strategies from a Laboratory Experiment," Passauer Diskussionspapiere, Volkswirtschaftliche Reihe V-67-15, University of Passau, Faculty of Business and Economics.
    2. Felipe Morandé & Mauricio Tejada, 2009. "Sources of Uncertainty in Conducting Monetary Policy in Chile," Central Banking, Analysis, and Economic Policies Book Series, in: Klaus Schmidt-Hebbel & Carl E. Walsh & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.),Monetary Policy under Uncertainty and Learning, edition 1, volume 13, chapter 12, pages 451-509, Central Bank of Chile.
    3. 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.
    4. Felipe Morandé & Mauricio Tejada, 2008. "Sources of Uncertainty for Conducting Monetary Policy in Chile," Working Papers Central Bank of Chile 492, Central Bank of Chile.
    5. Felipe Morandé L. & Mauricio Tejada G., 2009. "Persistent Supply Shocks: A Pain in the Neck for Central Banks?," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 12(3), pages 25-58, December.
    6. Felipe Morandé L. & Mauricio Tejada G., 2008. "Sources of Uncertainty in Monetary Policy Conduct in Chile," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 11(3), pages 45-80, December.

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