Imperfectly credible disinflation under endogenous time-dependent pricing

Marco Bonomo and Carlos Carvalho

No 355, Staff Reports from Federal Reserve Bank of New York

Abstract: The real effects of an imperfectly credible disinflation depend critically on the extent of price rigidity. Therefore, the study of how policymakers' credibility affects the outcome of an announced disinflation should include an analysis of the determinants of the frequency of price adjustments. In this paper, we examine how credibility affects the outcome of a disinflation in a model with endogenous time-dependent pricing rules. Both the initial degree of price rigidity, calculated optimally, and, more notably, 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: Monetary policy; Inflation (Finance); Price levels; Pricing (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Imperfectly Credible Disinflation under Endogenous Time-Dependent Pricing (2010)
Journal Article: Imperfectly Credible Disinflation under Endogenous Time‐Dependent Pricing (2010)
Working Paper: Imperfectly credible disinflation under endogenous time-ependent pricing (2005)
Working Paper: Imperfectly Credible Disinflation under Endogenous Time-Dependent Pricing (2005)
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