Imperfectly credible disinflation under endogenous time-ependent pricing

Carlos Carvalho and Marco Bonomo

No 600, FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) from EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil)

Abstract: The real effects of an imperfectly credible disinflation depend critically on the extent of price rigidity. Therefore, the study of how policymakers’ credibility affects the outcome of an announced disinflation should not be dissociated from the analysis of the determinants of the frequency of price adjustments. In this paper we examine how credibility affects the outcome of a disinflation in a model with endogenous timedependent pricing rules. Both the initial degree of price ridigity, calculated optimally, and, more notably, the changes in contract length during disinflation play an important role in the explanation of the effects of imperfect credibility. We initially evaluate the costs of disinflation in a setup where credibility is exogenous, and then allow agents to use Bayes rule to update beliefs about the 'type' of monetary authority that they face. In both cases, the interaction between the endogeneity of time-dependent rules and imperfect credibility increases the output costs of disinflation, but the pattern of the output path is more realistic in the case with learning.

Date: 2005-08-01
New Economics Papers: this item is included in nep-cba, nep-fin and nep-mac
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Citations: View citations in EconPapers (9)

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Related works:
Journal Article: Imperfectly Credible Disinflation under Endogenous Time-Dependent Pricing (2010)
Journal Article: Imperfectly Credible Disinflation under Endogenous Time‐Dependent Pricing (2010)
Working Paper: Imperfectly credible disinflation under endogenous time-dependent pricing (2008)
Working Paper: Imperfectly Credible Disinflation under Endogenous Time-Dependent Pricing (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:fgv:epgewp:600

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