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The Impact of Imperfect Credibility in a Transition to Price Stability

  • Anamaria Nicolae

    ()

  • Charles Nolan

    ()

In this paper we study the impact of a temporary lack of credibility in a transition to price stability. We quantify the effects of a period of disinflation on temporary output losses, and the impact of the lack of credibility on the optimal speed on disinflation. We demonstrate that the “disinflationary booms†found by Ball (1994) and Ireland (1997) may or may not disappear in an environment with imperfect credibility, depending on the speed of learning relative to the speed of disinflation. Finally we enquire whether the speed of the Volcker disinflation was excessive or not.

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File URL: http://www.st-andrews.ac.uk/economics/CDMA/papers/wp0402.pdf
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Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 200402.

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Date of creation: 15 Oct 2004
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Handle: RePEc:san:cdmawp:0402
Contact details of provider: Postal: School of Economics and Finance, University of St. Andrews, Fife KY16 9AL
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  1. Erceg, Christopher J. & Levin, Andrew T., 2003. "Imperfect credibility and inflation persistence," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 915-944, May.
  2. Peter N. Ireland, 1995. "Optimal disinflationary paths," Working Paper 95-01, Federal Reserve Bank of Richmond.
  3. Ball, Laurence, 1995. "Disinflation with imperfect credibility," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 5-23, February.
  4. Aubhik Khan & Robert G. King & Alexander L. Wolman, 2002. "Optimal Monetary Policy," NBER Working Papers 9402, National Bureau of Economic Research, Inc.
  5. Robert King & Alexander L. Wolman, 1999. "What Should the Monetary Authority Do When Prices Are Sticky?," NBER Chapters, in: Monetary Policy Rules, pages 349-404 National Bureau of Economic Research, Inc.
  6. Benabou, Roland & Konieczny, Jerzy D, 1994. "On Inflation and Output with Costly Price Changes: A Simple Unifying Result," American Economic Review, American Economic Association, vol. 84(1), pages 290-97, March.
  7. Peter N. Ireland, 1997. "Stopping inflations, big and small," Proceedings, Federal Reserve Bank of Cleveland, pages 759-782.
  8. Stefania Albanesi & V.V. Chari & Lawrence J. Christiano, 2002. "Expectation Traps and Monetary Policy," NBER Working Papers 8912, National Bureau of Economic Research, Inc.
  9. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
  10. Thomas J. Sargent, 1982. "The Ends of Four Big Inflations," NBER Chapters, in: Inflation: Causes and Effects, pages 41-98 National Bureau of Economic Research, Inc.
  11. Robert J. Gordon, 1982. "Why Stopping Inflation May Be Costly: Evidence from Fourteen Historical Episodes," NBER Chapters, in: Inflation: Causes and Effects, pages 11-40 National Bureau of Economic Research, Inc.
  12. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  13. 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.
  14. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  15. Laurence Ball & N. Gregory Mankiw & David Romer, 1988. "The New Keynsesian Economics and the Output-Inflation Trade-off," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 1-82.
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