On the 'Conquest' of Inflation
20 Pages Posted: 10 Jan 2002
Date Written: December 2001
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: Suggested Citation