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Why Speed Doesn’t Kill: Learning to Believe in Disinflation

Author

Listed:
  • Eric Schaling
  • Marco Hoeberichts

Abstract

Central bankers generally prefer to reduce inflation gradually. We show that a central bank may try to convince the private sector of its commitment to price stability by choosing to reduce inflation quickly. We call this "teaching by doing". We find that allowing for teaching by doing effects always speeds up the disinflation and leads to lower inflation persistence. So, we clarify why "speed" in the disinflation process does not necessarily "kill" in the sense of creating large output losses. This result also holds in an environment where private agents learn about the central bank’s inflation target using a constant gain algorithm.

Suggested Citation

  • Eric Schaling & Marco Hoeberichts, 2010. "Why Speed Doesn’t Kill: Learning to Believe in Disinflation," Working Papers 164, Economic Research Southern Africa.
  • Handle: RePEc:rza:wpaper:164
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    File URL: http://www.econrsa.org/node/187
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    Cited by:

    1. Kabundi, Alain & Schaling, Eric & Some, Modeste, 2015. "Monetary policy and heterogeneous inflation expectations in South Africa," Economic Modelling, Elsevier, vol. 45(C), pages 109-117.
    2. 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.
    3. Alain Kabundi & Eric Schaling, 2013. "Inflation and Inflation Expectations in South Africa: an Attempt at Explanation," South African Journal of Economics, Economic Society of South Africa, vol. 81(3), pages 346-355, September.
    4. 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.

    More about this item

    Keywords

    learning; disinflation; credibility; sacrifice ratio;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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