Disinflations in a model of imperfectly anchored expectations

Christopher Gibbs and Mariano Kulish

European Economic Review, 2017, vol. 100, issue C, 157-174

Abstract: We study disinflations under imperfect credibility of the central bank. We propose a framework to model imperfectly credible announcements and use it to study the distribution of the output cost for a given disinflation. Imperfect credibility is modeled as the extent to which agents rely on adaptive learning to form expectations. Lower credibility increases the mean, variance, and skewness of the distribution of the sacrifice ratio. When credibility is low, disinflations become very costly for adverse realizations of the shocks. But, an opportunistic disinflation, a disinflation implemented after a period of below trend inflation, can significantly lower the sacrifice ratio. With simulated data, we reinterpret the reduced form evidence in sacrifice ratio regressions. Coefficient estimates from these regressions can be misleading for policymakers considering the cost of disinflation.

Keywords: Disinflation; Inflation; Expectations; Adaptive learning; Anticipated structural change (search for similar items in EconPapers)
JEL-codes: E13 E31 E52 E58 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0014292117301551
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Disinflations in a model of imperfectly anchored expectations (2015)
Working Paper: Disinflations in a model of imperfectly anchored expectations (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:100:y:2017:i:c:p:157-174

DOI: 10.1016/j.euroecorev.2017.08.003

Access Statistics for this article

European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer

More articles in European Economic Review from Elsevier
Bibliographic data for series maintained by Catherine Liu ().