The Output Effect of a Transition to Price Stability When Velocity is Time-varying

Evans, L.; Nicolae, A.

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 endogenize time-varying velocity into the model developed by Ireland (1997) for analyzing optimal disinflation. The nonlinear 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.

Citation

Evans, L., & Nicolae, A. (2010). The Output Effect of a Transition to Price Stability When Velocity is Time-varying. Journal of Money, Credit and Banking, 42(5), 859-878. https://doi.org/10.1111/j.1538-4616.2010.00310.x

• Journal Article Type: Article
• Publication Date: Aug 1, 2010
• Deposit Date: Nov 17, 2010
• Journal: Journal of Money, Credit and Banking
• Print ISSN: 0022-2879
• Electronic ISSN: 1538-4616
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 42
• Issue: 5
• Pages: 859-878
• DOI: https://doi.org/10.1111/j.1538-4616.2010.00310.x
• Keywords: Price stability, Velocity, Disinflation, Output boom, Optimal speed of disinflation.
• Public URL: https://durham-repository.worktribe.com/output/1554141