Keywords: Monetary policy, disinflation, expectations, learning, macroeconomic modeling
Abstract: The costs of disinflation are explored using the Board's new
sticky-price rational expectations macroeconometric model of
the U.S. economy, FRB/US. The model nests both model consistent
and `restricted-information rational' expectations.
Monetary policy is governed by interest-rate reaction functions
of which two are considered: the well-known Taylor rule and another
rule that is more aggressive and richer in its specification, estimated
using data for the last fifteen years. Agents are required to learn of
shifts of the inflation target using linear updating rules.
The simulated costs of disinflation are compared with other estimates
of sacrifice ratios.
Full paper (126 KB PDF)
| Full paper (322 KB Postscript)
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Last update: September 17, 1997