Why Speed Doesn’t Kill: Learning to Believe in Disinflation

22 September 2012
Publication Type: Working Paper
JEL Code: E52, E58

Central bankers generally prefer to reduce inflation gradually. We show that a central bank may try to convince the private sector of its commitment to price stability by choosing to reduce inflation quickly. We call this ‘teaching by doing’. We find that allowing for teaching by doing effects always speeds up the disinflation and leads to lower inflation persistence. So, we clarify why ‘speed’ in the disinflation process does not necessarily ‘kill’ in the sense of creating large output losses. This result also holds in an environment where private agents learn about the central banks’s inflation target using a constant gain algorithm.

Series title: Working Paper 164
1 February 2010