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Credibility Dynamics and Disinflation Plans

Rumen Kostadinov () and Francisco Roldán

No 2020/085, IMF Working Papers from International Monetary Fund

Abstract: We study the optimal design of a disinflation plan by a planner who lacks commitment. Having announced a plan, the Central banker faces a tradeoff between surprise inflation and building reputation, defined as the private sector's belief that the Central bank is committed to the plan. Some plans are harder to sustain: the planner recognizes that paving out future grounds with temptation leads the way for a negative drift of reputation in equilibrium. Plans that successfully create low inflationary expectations balance promises of lower inflation with dynamic incentives that make them more credible. When announcing the disinflation plan, the planner takes into account these anticipated interactions. We find that, even in the zero reputation limit, a gradual disinflation is preferred despite the absence of inflation inertia in the private economy.

Keywords: WP; Phillips curve; government being; punishment regime; high-inflation stage Nash; choice of policy; government credibility; government's choice; rational government; equilibrium announcement; Inflation; Inflation targeting; Disinflation; Imperfect credibility; reputation; optimal monetary policy; time inconsistency; Nash inflation; inflation plan (search for similar items in EconPapers)
Pages: 32
Date: 2020-06-05
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Working Paper: Credibility dynamics and inflation expectations (2021) Downloads
Working Paper: Credibility Dynamics and Inflation Expectations (2021) Downloads
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Handle: RePEc:imf:imfwpa:2020/085