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Learning by Disinflating

  • Martin Ellison
  • Martin Ellison
  • Alina Barnett

Disinflationary episodes are a valuable source of information for economic agents trying to learn about the economy.� This paper is especially interested in how a policymaker 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 poicymaker 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.

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File URL: http://www.economics.ox.ac.uk/materials/papers/5466/paper579.pdf
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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 579.

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Date of creation: 01 Nov 2011
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Handle: RePEc:oxf:wpaper:579
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  1. Bruce McGough, 2003. "Shocking Escapes," Computing in Economics and Finance 2003 294, Society for Computational Economics.
  2. In-Koo Cho & Kenneth Kasa, 2003. "Learning Dynamics and Endogenous Currency Crises," Computing in Economics and Finance 2003 132, Society for Computational Economics.
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  9. Timothy Cogley & Christian Matthes & Argia M. Sbordone, 2011. "Optimal disinflation under learning," Staff Reports 524, Federal Reserve Bank of New York.
  10. 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.
  11. Thomas Sargent & Noah Williams & Tao Zha, 2004. "Shocks and government beliefs: the rise and fall of American inflation," Working Paper 2004-22, Federal Reserve Bank of Atlanta.
  12. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
  13. Timothy Cogley & Riccardo Colacito & Thomas J. Sargent, 2007. "Benefits from U.S. Monetary Policy Experimentation in the Days of Samuelson and Solow and Lucas," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 67-99, 02.
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  16. Martin Ellison & Tony Yates, 2007. "Escaping Volatile Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(4), pages 981-993, 06.
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