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Contacts, Credibility and Common Knowledge: Their Influenceon Inflation Convergence

Author

Listed:
  • Mr. Marcus Miller
  • Mr. Alan Sutherland

Abstract

In this paper three possible reasons are examined for a sluggish inflation response to a hard currency peg. Models of overlapping wage contracts are analyzed and shown to generate little inertia. This contrasts with the effects of government credibility and the speed of private sector learning, which are shown to have a major impact on the speed of inflation adjustment. But even if individual agents believe the government will not devalue, it is shown that inflation inertia can still arise if these expectations are not common knowledge.

Suggested Citation

  • Mr. Marcus Miller & Mr. Alan Sutherland, 1992. "Contacts, Credibility and Common Knowledge: Their Influenceon Inflation Convergence," IMF Working Papers 1992/026, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1992/026
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    Cited by:

    1. Ascari, Guido & Rankin, Neil, 2002. "Staggered wages and output dynamics under disinflation," Journal of Economic Dynamics and Control, Elsevier, vol. 26(4), pages 653-680, April.
    2. Agenor, Pierre-Richard, 1995. "Monetary shocks and exchange rate dynamics with informal currency markets," International Review of Economics & Finance, Elsevier, vol. 4(3), pages 211-226.
    3. Fender, John & Rankin, Neil, 2011. "A further contribution towards explaining why disinflation through currency pegging may cause a boom," Journal of International Money and Finance, Elsevier, vol. 30(3), pages 516-536, April.
    4. Agenor, Pierre-Richard, 1998. "Wage Contracts, Capital Mobility, and Macroeconomic Policy," Journal of Macroeconomics, Elsevier, vol. 20(1), pages 1-26, January.

    More about this item

    Keywords

    WP; price level; exchange rate; current price price level; price level rising; inflation inertia; price level jump; exchange rate peg; price level rate; Inflation; Exchange rates; Inflation persistence; Conventional peg; Rational expectations;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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