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A Cold-Turkey versus a Gradualist Approach in a Menu Cost Model

Sanguck Loh

The B.E. Journal of Macroeconomics, 2002, vol. 2, issue 1, 1-19

Abstract: Disinflations typically lead to recessions in actual economies. A classical policy issue is the choice between a cold-turkey and a gradualist approach to minimize the output loss associated with a period of disinflation. This paper explores which policy option is less costly in terms of foregone output through a menu cost model in which the credibility of government policies is the decisive factor in determining the appropriate speed of disinflation. It shows that, in the event of non-credibility, cold-turkey disinflation minimizes foregone output, whereas full credibility favors a gradualist approach.

Date: 2002
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DOI: 10.2202/1534-5998.1034

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