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Learning by Disinflating

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  • ALINA BARNETT
  • MARTIN ELLISON

Abstract

Disinflationary episodes are a valuable source of information for economic agents trying to learn about the economy. In this paper we are particularly interested in how policymakers can themselves learn by disinflating. The approach differs from the existing literature, which typically focuses on the learning of private agents during a disinflation. We build a model where both the policymaker and private agents learn, and ask what happens if the policymaker has to disinflate to satisfy a new central bank mandate specifying greater emphasis on inflation stabilisation. In this case, our results show that inflation may fall dramatically before it gradually rises to its new long run level. The potential for inflation to undershoot its long run level during a disinflationary episode suggests that caution should be exercised when assessing the success of any change in the policymaker's mandate.
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Suggested Citation

  • Alina Barnett & Martin Ellison, 2013. "Learning by Disinflating," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(4), pages 731-746, June.
  • Handle: RePEc:mcb:jmoncb:v:45:y:2013:i:4:p:731-746
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    Cited by:

    1. Christian Matthes & Francesca Rondina, 2012. "Two-sided Learning in New Keynesian Models: Dynamics, (Lack of) Convergence and the Value of Information," UFAE and IAE Working Papers 913.12, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    2. Ascari, Guido & Ropele, Tiziano, 2013. "Disinflation effects in a medium-scale New Keynesian model: Money supply rule versus interest rate rule," European Economic Review, Elsevier, vol. 61(C), pages 77-100.
    3. James B. Bullard, 2022. "Reflections on the Disinflationary Methods of Poincaré and Thatcher," Speech 94556, Federal Reserve Bank of St. Louis.
    4. Kolyuzhnov, Dmitri & Bogomolova, Anna & Slobodyan, Sergey, 2014. "Escape dynamics: A continuous-time approximation," Journal of Economic Dynamics and Control, Elsevier, vol. 38(C), pages 161-183.

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    More about this item

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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