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Federal Reserve Bank of New York
Staff Reports
Optimal disinflation under learning
Timothy Cogley
Christian Matthes
Argia M. Sbordone

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.

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Timothy Cogley & Christian Matthes & Argia M. Sbordone, Optimal disinflation under learning, Federal Reserve Bank of New York, Staff Reports 524, 2011, revised 01 May 2014.
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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.
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Keywords: inflation; monetary policy; learning; policy reforms; transitions
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