The Impact of Imperfect Credibility in a Transition to Price Stability

In this paper we study the impact of a temporary lack of credibility in a transition to price stability. We quantify the effects of a period of disinflation on temporary output losses, and the impact of the lack of credibility on the optimal speed on disinflation. We demonstrate that the “disinflationary booms†found by Ball (1994) and Ireland (1997) may or may not disappear in an environment with imperfect credibility, depending on the speed of learning relative to the speed of disinflation. Finally we enquire whether the speed of the Volcker disinflation was excessive or not.