Optimal Disinflation Under Learning

Christian Matthes, Argia Sbordone and Timothy Cogley ()

No 74, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: We model transitional dynamics that emerge after the adoption of a new monetary-policy rule. We assume that private agents learn about the new policy via Bayesian updating, and we study how learning affects the nature of the transition and choice of a new rule. The model endogenously generates time-varying volatility during the transition. Managing this volatility is the central bank's main challenge. The optimal policy depends on subtle features of the private sector's prior. Nevertheless, two robust conclusions emerge from our examples. First, the central bank can adjust target inflation freely without triggering high volatility. Second, none of our examples rationalizes a gradual reduction in inflation. On the contrary, inflation falls sharply at impact, overshoots the new target, and converges from below.

Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
https://red-files-public.s3.amazonaws.com/meetpapers/2011/paper_74.pdf (application/pdf)

Related works:
Working Paper: Optimal disinflation under learning (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:sed011:74

Access Statistics for this paper

More papers in 2011 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().