The Dynamic Effects of Disinflation Policies

Fabrice Collard, P. F ve and Julien Matheron
Authors registered in the RePEc Author Service: Patrick Fève

Working papers from Banque de France

Abstract: This paper investigates the effects of disinflation policies on key macroeconomic variables. Using postwar US data and episode techniques, we identify disinflation shocks as shocks that drive the inflation rate to a lower level in the long-run. We find that in the immediate aftermath of a disinflation policy, the economy enters in a persistent recession. The inflation rate increases above its long-run level and exhibits a positive hump-shaped response. A similar pattern is found for the nominal interest rate, which responds even more strongly in the short-run. We then show that the standard new Keynesian model fails to account for macroeconomic dynamics in disinflationary times. On the contrary a deep habit version of the model successfully accounts for the effects of disinflation policies.

Keywords: Disinflation policies; Deep Habits; New Keynesian Models. (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2007
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Working Paper: The Dynamic Effects of Disinflation Policies (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:190

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