Optimal disinflation under learning

Abstract: Highly volatile transition dynamics can emerge when a central bank disinflates while operating without full transparency. In our model, a central bank commits to a Taylor rule whose form is known but whose coefficients are not. Private agents learn about policy parameters via Bayesian updating. Under McCallum?s (1999) timing protocol, temporarily explosive dynamics can arise, making the transition highly volatile. Locally unstable dynamics emerge when there is substantial disagreement between actual and perceived feedback parameters. The central bank can achieve low average inflation, but its ability to adjust reaction coefficients is more limited.

Keywords: inflation; monetary policy; learning; policy reforms; transitions;

JEL Classification: E31; E52;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2014-05-01

Number: 524

Note: For a published version of this report, see Timothy Cogley, Christian Matthes, and Argia M. Sbordone, "Optimal Disinflation under Learning," Review of Economic Studies 82, no. 2 (April 2015): 791-824.