On the 'Conquest' of Inflation

20 Pages Posted: 10 Jan 2002

See all articles by Andrea Gerali

Andrea Gerali

Bank of Italy

Francesco Lippi

Bank of Italy - Research Department; Stanford University - The Hoover Institution on War, Revolution and Peace; Centre for Economic Policy Research (CEPR)

Date Written: December 2001

Abstract

Sargent (1999) warns that if policy makers' views on the unemployment-inflation trade-off are driven by empirical correlations, rather than theory, disinflations (escapes from high to low inflation) may periodically occur but are not bound to last. This Paper asks how different inflation objectives by the policy maker affect this result. We show that escapes in the neighborhood of zero inflation are less frequent and have a shorter duration, as policy objectives become more inflation averse. A sufficiently (but not infinitely) inflation averse policy maker never escapes Nash inflation and, on average, yields a lower inflation rate.

Keywords: Inflation bias, disinflation, learning, conservative bankers

JEL Classification: E5

Suggested Citation

Gerali, Andrea and Lippi, Francesco, On the 'Conquest' of Inflation (December 2001). CEPR Discussion Paper No. 3101. Available at SSRN: https://ssrn.com/abstract=294261

Andrea Gerali (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Francesco Lippi

Bank of Italy - Research Department ( email )

Via Nazionale 91
00184 Roma
Italy
+39 047 922580 (Phone)
+39 047 923723 (Fax)

Stanford University - The Hoover Institution on War, Revolution and Peace ( email )

434 Galvez Mall
Room 20 Tower
Stanford, CA 94305
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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