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Disinflation Shocks in the Eurozone: a DSGE Perspective

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  • Fève, Patrick
  • Matheron, Julien
  • Sahuc, Jean-Guillaume

Abstract

We investigate the effects of disinflation policies on key macroeconomic variables. Using euro area data and structural vector autoregressions (SVARs), we identify disinflation shocks as the only shocks that drive nominal variables to a lower long-run level. We find that in the immediate aftermath of a disinflation shock, the euro area enters in a persistent recession. We use these dynamic responses to estimate a DSGE model with imperfect information about the disinflation shock. We find that both nominal and real frictions and monetary policy gradualism have played a prominent role in the recessionary effect of disinflation shocks. Conversely, allowing for imperfect credibility does not yield a better fit, except when we shut key model's frictions down. Copyright (c) 2010 The Ohio State University.
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Suggested Citation

  • Fève, Patrick & Matheron, Julien & Sahuc, Jean-Guillaume, 2009. "Disinflation Shocks in the Eurozone: a DSGE Perspective," TSE Working Papers 09-080, Toulouse School of Economics (TSE).
  • Handle: RePEc:tse:wpaper:22274
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    Cited by:

    1. Michael U. Krause & Stéphane Moyen, 2016. "Public Debt and Changing Inflation Targets," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(4), pages 142-176, October.
    2. Pfister, C., 2007. "Labour market flexibility: what does Banque de France research tell us?," Quarterly selection of articles - Bulletin de la Banque de France, Banque de France, issue 10, pages 79-93, Winter.
    3. Philippe Andrade & Jordi Galí & Hervé Le Bihan & Julien Matheron, 2017. "The optimal inflation target and the natural rate of interest," Economics Working Papers 1591, Department of Economics and Business, Universitat Pompeu Fabra.
    4. Ascari, Guido & Ropele, Tiziano, 2012. "Disinflation in a DSGE perspective: Sacrifice ratio or welfare gain ratio?," Journal of Economic Dynamics and Control, Elsevier, vol. 36(2), pages 169-182.
    5. Ascari, Guido & Ropele, Tiziano, 2013. "Disinflation effects in a medium-scale New Keynesian model: Money supply rule versus interest rate rule," European Economic Review, Elsevier, vol. 61(C), pages 77-100.
    6. Guido Ascari & Tiziano Ropele, 2008. " Sacrifice Ratio or Welfare Gain Ratio? Disinflation in a DGSE monetary model," CDMA Conference Paper Series 0806, Centre for Dynamic Macroeconomic Analysis.
    7. Zobia BHATTI & Abdul QAYYUM, 2016. "The Cost of Low Inflation in Case of Pakistan," Journal of Economics Library, KSP Journals, vol. 3(2), pages 257-268, June.

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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