Working Paper: CEPR ID: DP3101
Authors: Andrea Gerali; Francesco Lippi
Abstract: Sargent (1999) warns that if policy makers? views on the unemployment-inflation trade-off are driven by empirical correlations, rather than theory, disinflations (escapes from high to low inflation) may periodically occur but are not bound to last. This Paper asks how different inflation objectives by the policy maker affect this result. We show that escapes in the neighborhood of zero inflation are less frequent and have a shorter duration, as policy objectives become more inflation averse. A sufficiently (but not infinitely) inflation averse policy maker never escapes Nash inflation and, on average, yields a lower inflation rate.
Keywords: conservative bankers; disinflation; inflation bias; learning
JEL Codes: E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased inflation aversion of policy makers (E31) | decreased frequency of escapes from high inflation to low inflation (E31) |
| increased inflation aversion of policy makers (E31) | decreased duration of low inflation episodes (E31) |
| conservative policy makers (E65) | lower average inflation rate (E31) |
| lower variability in policy objectives (E61) | lower average inflation rate (E31) |
| conservative policy makers (E65) | less variation in inflation targets (E31) |
| less variation in inflation targets (E31) | dampened responsiveness to changes in unemployment-inflation tradeoff (E24) |