Can Cold Turkey Reduce Inflation Inertia? Evidence on Disinflation and Level‐k Thinking from a Laboratory Experiment

Marcus Giamattei

Journal of Money, Credit and Banking, 2022, vol. 54, issue 8, 2477-2517

Abstract: It is widely believed that inflation inertia varies with the policy pursued. In a novel experiment, price setters determine inflation rates and react to a central bank's indicator, which is implemented exogenously either as cold turkey or gradual disinflation. In a third treatment, subjects in the role of a central banker set the indicator endogenously, potentially reducing inertia by signaling to be a tough central banker. I find inertia to be structurally stable and invariant to policies. The data can be organized by a model of level‐k$k$ thinking, which shows that cold turkey improves only a few subjects' adjustment while leaving many behind.

Date: 2022
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https://doi.org/10.1111/jmcb.12904

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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:54:y:2022:i:8:p:2477-2517

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