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Imperfectly Credible Disinflation under Endogenous Time-Dependent Pricing

Authors


  • We are grateful to the editor Pok-Sang Lam and two annonymous referees for valuable suggestions. We also thank participants at the EEA-ESEM, LACEA, LAMES, “Microeconomic Pricing and the Macroeconomy” workshop at CEU, and seminars at EPGE-FGV, Princeton, PUC-Rio, Queen Mary–University of London, UIUC, Universidade Nova de Lisboa, Université de Montreal, UCSC, Bank of Japan, and Sveriges Riksbank for helpful comments. Iana Ferrão de Almeida provided competent research assistance. Marco Bonomo would like to thank the Bendheim Center for Finance, Princeton University, for hospitality, and CAPES (Ministry of Education, Brazil) for financial support. Carlos Carvalho gratefully acknowledges financial support while at Princeton University. The views expressed in this paper are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.

Abstract

The real effects of an imperfectly credible disinflation depend critically on the extent of price rigidity. We examine this interaction in a model with endogenous time-dependent pricing. Both the endogenous initial degree of price rigidity and changes in the duration of price spells during disinflation are important in explaining the effects of imperfect credibility. We initially consider a setup where the degree of credibility is fixed and then allow agents to update beliefs about the “type” of monetary authority that they face. In both cases, the interaction between endogeneity of pricing behavior and imperfect credibility increases the output costs of disinflation.

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