Imperfect Credibility and Inflation Persistence

33 Pages Posted: 11 Dec 2001

See all articles by Andrew T. Levin

Andrew T. Levin

affiliation not provided to SSRN

Christopher J. Erceg

Board of Governors of the Federal Reserve System

Date Written: October 2001

Abstract

In this paper, we formulate a dynamic general equilibrium model with staggered nominal contracts, in which households and firms use optimal filtering to disentangle persistent and transitory shifts in the monetary policy rule. The calibrated model accounts quite well for the dynamics of output and inflation during the Volcker disinflation, and implies a sacrifice ratio very close to the estimated value. Our approach indicates that inflation persistence and substantial costs of disinflation can be generated in an optimizing-agent framework, without relaxing the assumption of rational expectations or relying on arbitrary modifications to the aggregate supply relation.

Keywords: Monetary policy, disinflation, sacrifice ratio, signal extraction

JEL Classification: E31, E32, E51

Suggested Citation

Levin, Andrew and Erceg, Christopher J., Imperfect Credibility and Inflation Persistence (October 2001). Available at SSRN: https://ssrn.com/abstract=293106 or http://dx.doi.org/10.2139/ssrn.293106

Andrew Levin (Contact Author)

affiliation not provided to SSRN

Christopher J. Erceg

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2575 (Phone)
202-736-5638 (Fax)

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