Disinflations in a Model of Imperfectly Anchored Expectations
56 Pages Posted: 18 Sep 2015
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Disinflations in a Model of Imperfectly Anchored Expectations
Disinflations in a Model of Imperfectly Anchored Expectations
Date Written: September 16, 2015
Abstract
We study disinflations under imperfect credibility of the central bank. Imperfect credibility is modeled as the extent to which agents rely on adaptive learning to form expectations. Lower credibility increases the mean, variance, and skewness of the distribution of sacrifice ratios. When credibility is low, disinflationary policies become very costly for adverse realizations of the shocks. Even if the impact of an announcement decreases with lower credibility, pre-announcing a disinflation reduces the sacrifice ratio. Additionally, disinflationary policies implemented after a period of below trend inflation lead to lower sacrifice ratios. Opportunistic disinflations are desirable when credibility is low.
Keywords: disinflation, sacrifice ratio, imperfect credibility, adaptive expectations, rational expectations
JEL Classification: E52
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