Empirical studies show that successful disinflations entail a period of output contraction. Using a medium-scale New Keynesian model, we compare the effects of disinflations of different speed and timing, implemented through either a money supply rule or an interest rate rule. In terms of transitional output loss, cold-turkey disinflations under an interest rate rule are less costly than those under a money supply rule and are accomplished more rapidly. Furthermore, gradual or anticipated disinflations deliver lower sacrifice ratios. From a welfare perspective, despite the temporary economic contraction, the transitional welfare loss is quantitatively negligible, so that disinflations are overall welfare-improving. The overall welfare gain is not affected by how the disinflation is actually implemented: what really matters is the achievement of a permanently lower inflation rate
Disinflation effects in a medium-scale New Keynesian model: Money supply rule versus interest rate rule
ASCARI, GUIDO;
2013-01-01
Abstract
Empirical studies show that successful disinflations entail a period of output contraction. Using a medium-scale New Keynesian model, we compare the effects of disinflations of different speed and timing, implemented through either a money supply rule or an interest rate rule. In terms of transitional output loss, cold-turkey disinflations under an interest rate rule are less costly than those under a money supply rule and are accomplished more rapidly. Furthermore, gradual or anticipated disinflations deliver lower sacrifice ratios. From a welfare perspective, despite the temporary economic contraction, the transitional welfare loss is quantitatively negligible, so that disinflations are overall welfare-improving. The overall welfare gain is not affected by how the disinflation is actually implemented: what really matters is the achievement of a permanently lower inflation rateI documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.