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Imperfectly Credible Disinflation under Endogenous Time-Dependent Pricing

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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.

Keywords: E31; E52; credibility; disinflation; endogenous time-dependent pricing; optimal price setting

Document Type: Research Article

DOI: http://dx.doi.org/10.1111/j.1538-4616.2010.00308.x

Affiliations: 1: Marco Bonomo is an Associate Professor at the Graduate School of Economics, Getulio Vargas Foundation (  )., Email: bonomo@fgv.br 2: Carlos Carvalho is an Economist at the Federal Reserve Bank of New York (  )., Email: carlos.carvalho@ny.frb.org

Publication date: August 1, 2010

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