TY  - JOUR
AU  - Calvo,Guillermo
AU  - Celasun,Oya
AU  - Kumhof,Michael
TI  - Inflation Inertia and Credible Disinflation - The Open Economy Case
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9557
PY  - 2003
Y2  - March 2003
UR  - http://www.nber.org/papers/w9557
L1  - http://www.nber.org/papers/w9557.pdf
N1  - Author contact info:
Guillermo A. Calvo
Columbia University
School of International and Public Affairs
420 West 118th St, Room 1303B
MC3332
New York, NY 10027
Tel: 212/854-4264
E-Mail: gc2286@columbia.edu

oya celasun
E-Mail: ocelasun@imf.org

Michael Kumhof
Research Department, IMF
Modelling Division, Room 9-548E
700 19th Street, NW
Washington, DC  20008
Tel: 202-623-6769
Fax: 202-623-6334
E-Mail: mkumhof@imf.org
AB  - This paper develops a model of inflation inertia based on optimizing forward looking staggered price setting in a small open economy. Unlike in current models of sticky prices, transitions to a lower steady state inflation rate take time even if they are fully credible, and they are associated with significant output losses. There is a welfare trade-off between these output losses and the gains from smaller inflationary distortions. For reasonable parameter values inflation stabilization improves welfare. The optimal steady state is reached at the Friedman rule. Technical appendices are available at www.nber.org/data-appendix/w9557/ inert-techapp.pdf
ER  -