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Ambition versus Gradualism in Disinflation Horizons under Bounded Rationality: The Case of Chile

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  • Ali Al-Eyd

Abstract

This paper uses a stylized New Keynesian Model to examine alternative disinflation strategies under optimal monetary policy conditions with bounded rationality. The model is calibrated for Chile and presents some policy tradeoffs not necessarily captured under the full rational expectations solution. Under rational expectations and in the absence of nominal inertia, the optimal policy suggests an ambitious disinflation horizon as expectations of inflation are revised immediately. However, under full adaptive learning, a distinct policy trade-off emerges between ambition and gradualism. We also find that when expectations exhibit a degree of imperfect knowledge it is optimal to increase the strength of the policy response relative to that of the perfect knowledge solution.

Suggested Citation

  • Ali Al-Eyd, 2008. "Ambition versus Gradualism in Disinflation Horizons under Bounded Rationality: The Case of Chile," National Institute of Economic and Social Research (NIESR) Discussion Papers 308, National Institute of Economic and Social Research.
    • Handle: RePEc:nsr:niesrd:308
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    Cited by:

    1. Giamattei, Marcus, 2015. "Cold Turkey vs. Gradualism - Evidence on Disinflation Strategies from a Laboratory Experiment," Passauer Diskussionspapiere, Volkswirtschaftliche Reihe V-67-15, University of Passau, Faculty of Business and Economics.
    2. Marcus Giamattei, 2022. "Can Cold Turkey Reduce Inflation Inertia? Evidence on Disinflation and Level‐k Thinking from a Laboratory Experiment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(8), pages 2477-2517, December.

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