Contacts, Credibility and Common Knowledge: Their Influenceon Inflation Convergence

Marcus Miller and Alan Sutherland

No 1992/026, IMF Working Papers from International Monetary Fund

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. This contrasts 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, it is shown that inflation inertia can still arise if these expectations are not common knowledge.

Keywords: WP; price level; exchange rate; current price price level; price level rising; inflation inertia; price level jump; exchange rate peg; price level rate; Inflation; Exchange rates; Inflation persistence; Conventional peg; Rational expectations (search for similar items in EconPapers)
Pages: 24
Date: 1992-03-01
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Journal Article: Contracts, Credibility, and Common Knowledge: Their Influence on Inflation Convergence (1993)
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