DP3101 On the 'Conquest' of Inflation
|Author(s):||Andrea Gerali, Francesco Lippi|
|Publication Date:||December 2001|
|Keyword(s):||conservative bankers, disinflation, inflation bias, learning|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=3101|
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.