Two anonymous referees and the editor of this journal, Ken West, made detailed and insightful comments that significantly improved our understanding of our model. We also thank Bill Branch, Lynne Evans, Ken Kasa, Anamaria Nicolae, Andrew Scott, and Jouko Vilmunen for their suggestions. Martin Ellison acknowledges support from an ESRC Research Fellowship, “Improving Monetary Policy for the 21st Century” (RES-000-27-0126). The views expressed in this paper do not necessarily reflect those of the Bank of England or the Bank of Finland.
Shorter Papers, Discussions, and Letters
Learning by Disinflating
Article first published online: 17 MAY 2013
© 2013 The Ohio State University
Journal of Money, Credit and Banking
Volume 45, Issue 4, pages 731–746, June 2013
How to Cite
BARNETT, A. and ELLISON, M. (2013), Learning by Disinflating. Journal of Money, Credit and Banking, 45: 731–746. doi: 10.1111/jmcb.12022
- Issue published online: 17 MAY 2013
- Article first published online: 17 MAY 2013
- Manuscript Accepted: 28 MAR 2012
- Manuscript Received: 8 APR 2010
- escape dynamics;
- monetary policy
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 stabilization. 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.