The differing patterns among these various measures suggest that comparisons between the 2010 disinflation
and today's disinflation
might benefit from digging into the details.
Erceg and Levin (2003), in another influential paper, studied the episode of the Volcker disinflation
in the US using a model in which agents learn about the ultimate intentions of the central bank.
This paper's empirical method allows us to measure the sacrifice ratio as the costs of a deliberate disinflation
policy in contrast to, for example, the output costs of a series of negative cost push shocks.
for each country are identified as follows.
With results similar to ours, Balvers and Cosimano (1994) find that rapid disinflation
is preferred when inflation is high, although in their framework rapid reduction in money growth is warranted to facilitate learning.
If we think of the period as six months, then fully credible disinflations
spread out over a year or more will not have negative output effects.
8 The timing and extent of disinflation
were, of course, always somewhat uncertain, and some financial distress did occur during postwar disinflations
Prediction 4 is the distinct statement that if the monetary policymaker is more credible, taking that credibility as fixed, speedier disinflations
In particular, the evidence has implications for traditional views on the output cost of fighting inflation, the timing and speed of deliberate disinflations
, the benefits of preemptive monetary policy, and the merits of monetary policy experimentation.
Theoretically, positive surprises should raise output just as negative surprises reduce it; announced disinflations
should not reduce output on average.
These papers discuss the two most dramatic disinflation
programs in West Europe.
In a disinflation
process, this means that the CB may be too timid in fighting inflation in the presence of shocks that appreciate the currency in real terms.