Contracts, Credibility, and Common Knowledge: Their Influence on Inflation Convergence

Marcus Miller and Alan Sutherland ()

IMF Staff Papers, 1993, vol. 40, issue 1, 178-201

Abstract: In this paper, three possible reasons are examined for a sluggish inflation response to a hard-currency peg. Models of overlapping wage contracts are analyzed and shown to generate little inertia. These findings are contrasted with the effects of government credibility and the speed of private sector learning, which are shown to have a major impact on the speed of inflation adjustment. But even if individual agents believe the government will not devalue its currency, it is shown that inflation inertia can still arise if these expectations are not common knowledge.

JEL-codes: E31 F31 (search for similar items in EconPapers)
Date: 1993
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Working Paper: Contacts, Credibility and Common Knowledge: Their Influenceon Inflation Convergence (1992)
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