Staff Reports
Optimal Disinflation under Learning
2014   November 2011  Number 524
Revised May 2014
JEL classification: E31, E52

Authors: Timothy Cogley, Christian Matthes, and Argia M. Sbordone

Highly volatile transition dynamics can emerge when a central bank disinflates while operating without full transparency. In our model, a central bank commits to a Taylor rule whose form is known but whose coefficients are not. Private agents learn about policy parameters via Bayesian updating. Under McCallum’s (1999) timing protocol, temporarily explosive dynamics can arise, making the transition highly volatile. Locally unstable dynamics emerge when there is substantial disagreement between actual and perceived feedback parameters. The central bank can achieve low average inflation, but its ability to adjust reaction coefficients is more limited.
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