Disinflation effects in a medium-scale New Keynesian model: Money supply rule versus interest rate rule

Guido Ascari and Tiziano Ropele

European Economic Review, 2013, vol. 61, issue C, 77-100

Abstract: Empirical studies show that successful disinflations entail a period of output contraction. Using a medium-scale New Keynesian model, we compare the effects of disinflations of different speed and timing, implemented through either a money supply rule or an interest rate rule. In terms of transitional output loss, cold-turkey disinflations under an interest rate rule are less costly than those under a money supply rule and are accomplished more rapidly. Furthermore, gradual or anticipated disinflations deliver lower sacrifice ratios. From a welfare perspective, despite the temporary economic contraction, the transitional welfare loss is quantitatively negligible, so that disinflations are overall welfare-improving. The overall welfare gain is not affected by how the disinflation is actually implemented: what really matters is the achievement of a permanently lower inflation rate.

Keywords: Disinflation; Sacrifice ratio; Welfare (search for similar items in EconPapers)
JEL-codes: E31 E5 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (17)

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Working Paper: Disinflation effects in a medium-scale New Keynesian model: money supply rule versus interest rate rule (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:61:y:2013:i:c:p:77-100

DOI: 10.1016/j.euroecorev.2013.03.004

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