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Optimal disinflationary paths

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  • Peter N. Ireland

Abstract

This paper characterizes optimal monetary policy in the context of a general equilibrium model with optimizing agents and staggered price setting. Starting from a steady state with positive inflation, a rapid disinflation is desirable when announcements of future monetary policy are fully credible. Disinflationary policy yields substantial losses in output and employment when the monetary authority lacks credibility; nevertheless, the benefits of disinflation still exceed the costs. Disinflation often fails to be welfare-improving, however, when lost seignorage revenues must be replaced using other distortionary taxes.

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  • Peter N. Ireland, 1995. "Optimal disinflationary paths," Working Paper 95-01, Federal Reserve Bank of Richmond.
    • Handle: RePEc:fip:fedrwp:95-01
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    Keywords

    Inflation (Finance); Monetary policy;

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