Imperfectly Credible Disinflation under Endogenous Time-Dependent Pricing

FRB of New York Staff Report No. 355

38 Pages Posted: 17 Nov 2008 Last revised: 3 Jun 2010

See all articles by Marco Bonomo

Marco Bonomo

Insper Institute of Education and Research

Carlos Carvalho

Asset 1 Investment Company; Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: May 31, 2010

Abstract

The real effects of an imperfectly credible disinflation depend critically on the extent of price rigidity. In this paper, we examine how credibility affects the outcome of a disinflation in a model with endogenous time-dependent pricing rules. Both the endogenous initial degree of price rigidity and changes in the duration of price spells during disinflation play an important role in explaining the effects of imperfect credibility. We initially consider the costs of disinflation when the degree of credibility is fixed, and then allow agents to use Bayes’ rule to update beliefs about the “type” of monetary authority that they face. In both cases, the interaction between the endogeneity of time-dependent rules and imperfect credibility increases the output costs of disinflation. The pattern of the output response is more realistic in the case with learning.

Keywords: disinflation, optimal price setting, endogenous time-dependent pricing

JEL Classification: E31, E52

Suggested Citation

Bonomo, Marco and Carvalho, Carlos, Imperfectly Credible Disinflation under Endogenous Time-Dependent Pricing (May 31, 2010). FRB of New York Staff Report No. 355, Available at SSRN: https://ssrn.com/abstract=1299256 or http://dx.doi.org/10.2139/ssrn.1299256

Marco Bonomo

Insper Institute of Education and Research ( email )

R Quata 300
Sao Paulo, 04542-030
Brazil

Carlos Carvalho (Contact Author)

Asset 1 Investment Company ( email )

Avenida Juscelino Kubitschek, 1600/Conj 52
São Paulo, São Paulo
Brazil

HOME PAGE: http://www.asset1.com.br

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics ( email )

Rua Marques de Sao Vicente, 225/206F
Rio de Janeiro, RJ 22453
Brazil

HOME PAGE: http://https://sites.google.com/site/cvianac2/carloscarvalho

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
82
Abstract Views
760
rank
331,182
PlumX Metrics