Imperfectly-Credible Disinflation of Small Inflations

Lynne Evans () and Anamaria Nicolae
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Lynne Evans: Newcastle University Business School

No 2010_01, Department of Economics Working Papers from Durham University, Department of Economics

Abstract: In this paper we study and quantify the e¤ects of a disinflationary policy on output and welfare. Our focus is the policy question of the optimal response to low inflation.The analysis takes place in the context of a DSGE model with sticky prices, time varying velocity and imperfect credibility. The nonlinear solution method reveals that early output losses may be more pronounced and more prolonged than previously suggested in the literature, and there may be insufficient compensation from a subsequent higher steady state to justify taking any disinflationary policy action in some cases.

Keywords: price stability; velocity; disinlfation; output boom; optimal speed of disinlfation (search for similar items in EconPapers)
JEL-codes: E20 E32 F32 F41 (search for similar items in EconPapers)
Date: 2010-01-01
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