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The output effect of a transition to price stability when velocity is time varying

Lookup NU author(s): Dr Lynne Evans

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Abstract

This paper explores the effect of time-varying velocity on output responses to policies for reducing/stopping inflation. We study a dynamic general equilibrium model with sticky prices in which we introduce time-varying velocity. Specifically, we endogenise time-varying velocity into the model developed by Ireland (1997) for analysing optimal disinflation. The non-linear solution method reveals that, depending on velocity, the 'disinflationary boom' found by Ball (1994) may disappear even under perfect credibility; and that early output losses may be much larger than previously thought. Indeed, we find that a gradual disinflation from a low inflation may even be undesirable.

Publication metadata

Author(s): Evans L, Nicolae A

Publication type: Article

Publication status: Published

Journal: Journal of Money, Credit and Banking

Year: 2010

Volume: 42

Issue: 5

Pages: 859-878

Print publication date: 15/07/2010

ISSN (print): 0022-2879

ISSN (electronic): 1538-4616

Publisher: Wiley-Blackwell

URL: http://dx.doi.org/10.1111/j.1538-4616.2010.00310.x

DOI: 10.1111/j.1538-4616.2010.00310.x

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