Monopolistic competition, credibility and the output costs of disinflation programs An analysis of price controls (original) (raw)

The ex ante credibility of disinflation policy and the cost of reducing inflation*

Journal of Macroeconomics, 2001

paper contains an empirical study of the effects of credibility on the cost of disirtflatJon. The analysis is based on a dataset composed of seventy-two disinflation episodes from 19 OECD countries. We measure the "'ex ante credibility" of a disinflation episode as the probability of a successful disinflation conditional on economic and polilScal factors known to private agents on the eve of the disinflation. Under a variety of empirical specifications we find that more credible disinflations are associated with smaller losses in aggregate output. *We thank seminar participants at the Federal Reserve Bank of Richrnond, the 1997 NBER Summer Monetary Economics Program, and two anonymous referees for valuable suggestions on an earlier draft of this paper.

Inflation Inertia and Credible Disinflation - The Open Economy Case

2003

This paper develops a model of inflation inertia based on optimizing forward looking staggered price setting in a small open economy. Unlike in current models of sticky prices, transitions to a lower steady state inflation rate take time even if they are fully credible, and they are associated with significant output losses. There is a welfare trade-off between these output losses and the gains from smaller inflationary distortions. For reasonable parameter values inflation stabilization improves welfare. The optimal steady state is reached at the Friedman rule.

Policy credibility and alternative approaches to disinflation

Research in Economics, 2017

This paper examines how central bank credibility affects the merits of a "gradualist" versus "cold turkey" approach to disinflation in a DSGE model in which private agents use optimal filtering to infer the central bank's nominal anchor. Our analysis is applied to two episodes of sharp and deliberate monetary tightening in the United States-the post-WWI deflation and the Volcker disinflation. For a policy regime with relatively high credibility, our analysis highlights the benefits of a gradualist approach; thus, the aggressive tightening that occurred in 1920-21 did not seem warranted. In contrast, for a policy regime with relatively low credibility (such as the Federal Reserve in late 1980), an aggressive policy stance can play an important signalling role by making the policy shift more evident to private agents.

Inflation inertia and credible disinflation

Journal of International Economics, 2007

We develop a model of optimizing forward-looking staggered price setting where even fully credible disinflations display a delayed and gradual inflation response and significant output losses. There is a welfare trade-off between these output losses and the gains from smaller inflationary distortions. For reasonable parameter values disinflation improves welfare, and more so if it is phased in gradually. The pricing assumption of our model yields dynamics that are similar to models of sticky information, but its state space is much simpler, thereby allowing for the application of standard linearization methods.

Endogenous time-dependent rules and the costs of disinflation with imperfect credibility

2003

This paper examines the output effects of monetary disinßation in a model with endogenous time-dependent pricing rules and imperfect credibility of the disinßation policy. We Þnd that these features interact to generate an additional effect on top * Marco Bonomo would like to thank the Bendheim Center for Finance, Princeton University, for hospitality, and CAPES (Ministry of Education, Brazil) for

Inflation Shocks and Disinflation: Stylised Facts from the Past 50 Years

Financial and economic review, 2022

In our study, we examine the circumstances under which major inflation shocks lead to persistently high inflation. For our analysis, we use macroeconomic data from a broad sample of countries for the past fifty years or more. We identify several cases where inflation rises from the single-digit range to above 20 per cent, followed by successful disinflation within two years. Similarly, there are many examples where inflation remains high after an initial shock. The former cases are characterised by more pronounced increases in interest rates during inflation shocks, more disciplined fiscal policy and favourable commodity price developments. Examining the same sample, we also show that the disinflation after a period of persistently high inflation was not typically accompanied by a significant slowdown in the real economy and instead was often followed by higher economic growth. In the disinflationary episodes we identified, the size of the real cost of disinflation is negatively correlated with the central bank independence, suggesting that a disinflationary commitment played a positive role.

Imperfectly Credible Disinflation under Endogenous Time-Dependent Pricing

Journal of Money, Credit and Banking, 2010

The real e¤ects of an imperfectly-credible disin ‡ation depend critically on the extent of price rigidity. We examine how credibility a¤ects the outcome of a disin ‡ation 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 disin ‡ation play an important role in explaining the e¤ects of imperfect credibility. We initially consider the costs of disin ‡ation when the degree of credibility is …xed, 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 disin ‡ation. The pattern of the output response is more realistic in the case with learning.

Credibility and monetary policy under inflation targeting ghrissi mhamdi and abdelkader aguir and ramzi farhani

2015

After more than two decades of inflation targeting in the world, it is important to evaluate if the adoption of this regime in a relevant developing country contributed to the creation of a better environment for the process of entrepreneurs' expectations formation. Brazil is part of an important group of developing countries and represents a potential laboratory experiment in which the effects of an adoption of inflation targeting after more than a decade can be evaluated. Not enough is known about the consequences of inflation targeting credibility on both monetary policy and monetary policy transmission channels in developing countries that adopted inflation targeting. Emphasizing the role of transparency and the credibility of monetary policy as a performance criterion that motivate any country wishing to adopt an inflation targeting regime, this study leads to the fact that these two basic principles toward which a inflation targeting regime cannot be achieved without respe...