Optimal disinflationary paths

Peter Ireland

No 95-01, Working Paper from Federal Reserve Bank of Richmond

Abstract: This paper characterizes optimal monetary policy in the context of a general equilibrium model with optimizing agents and staggered price setting. Starting from a steady state with positive inflation, a rapid disinflation is desirable when announcements of future monetary policy are fully credible. Disinflationary policy yields substantial losses in output and employment when the monetary authority lacks credibility; nevertheless, the benefits of disinflation still exceed the costs. Disinflation often fails to be welfare-improving, however, when lost seignorage revenues must be replaced using other distortionary taxes.

Keywords: Inflation (Finance); Monetary policy (search for similar items in EconPapers)
Date: 1995
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Citations: View citations in EconPapers (33)

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