Disinflation With Imperfect Credibility

Laurence Ball

NBER Working Paper No. 3983
Issued in February 1992
NBER Program(s):   EFG   ME

This paper presents a theory of the real effects of disinflation. As in New Keynesian models, price adjustment is staggered across firms, As in New Classical models, credibility is imperfect: the monetary authority may not complete a promised disinflation. The combination of imperfect credibility and staggering yields more plausible results than either of these assumptions alone. In particular, an announced disinflation reduces expected output if credibility is sufficiently low.

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(153 K)

Published: Journal of Monetary Economics, December 1994.

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