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

Guido Ascari and Tiziano Ropele

No 867, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

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 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 transitional economic contraction, disinflations are overall welfare-improving. Interestingly, 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; nonlinearities (search for similar items in EconPapers)
JEL-codes: E31 E5 (search for similar items in EconPapers)
Date: 2012-04
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Journal Article: Disinflation effects in a medium-scale New Keynesian model: Money supply rule versus interest rate rule (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_867_12

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