Disinflations in a model of imperfectly anchored expectations

Christopher Gibbs and Mariano Kulish

No 2015-22, Discussion Papers from School of Economics, The University of New South Wales

Abstract: We study disinflations under imperfect credibility of the central bank. Imperfect credibility is modeled as the extent to which agents rely on adaptive learning to form expectations. Lower credibility increases the mean, variance, and skewness of the distribution of sacrifice ratios. When credibility is low, disinflationary policies become very costly for adverse realizations of the shocks. Even if the impact of an announcement decreases with lower credibility, pre-announcing a disinflation reduces the sacrifice ratio. Additionally, disinflationary policies implemented after a period of below trend inflation lead to lower sacrifice ratios. Opportunistic disinflations are desirable when credibility is low.

Keywords: disinflation; sacrifice ratio; imperfect credibility; adaptive expectations; rational expectations (search for similar items in EconPapers)
JEL-codes: E52 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2015-09
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Disinflations in a model of imperfectly anchored expectations (2017)
Working Paper: Disinflations in a model of imperfectly anchored expectations (2015)
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