Imperfect credibility and inflation persistence

Preprint
Publisher Website
Google Scholar
  • 1 January 2001
    • preprint
      • Published in RePEc
Abstract
In this paper, we formulate a dynamic general equilibrium model with staggered nominal contracts, in which households and firms use optimal filtering to disentangle persistent and transitory shifts in the monetary policy rule. The calibrated model accounts quite well for the dynamics of output and inflation during the Volcker disinflation, and implies a sacrifice ratio very close to the estimated value. Our approach indicates that inflation persistence and substantial costs of disinflation can be generated in an optimizing-agent framework, without relaxing the assumption of rational expectations or relying on arbitrary modifications to the aggregate supply relation.
All Related Versions

This publication has 0 references indexed in Scilit: