As a result, welfare overall is higher under the gradualist disinflation.
In order to simulate a disinflation it is necessary to derive starting values for variables based on an initial inflationary steady state.
To simulate a disinflation, it is necessary to derive starting values for the predetermined variables based on an initial inflationary steady state.
Again, we assume the announcement is fully credible and that the disinflation program is not known in advance. 22.
Figure 2 shows that, in this case, optimal policy smooths the short-run costs over time by taking a gradual approach to disinflation.
With a twoperiod disinflation, inflation inertia is less problematic: relative prices are closer to the profit-maximizing level if firms were allowed to continuously reset.
The costs of disinflation are immediate but transitory; the benefits of the disinflation are permanent but delayed.
Recall that a disinflation implies a fall in the expected inflation rate and the nominal interest rate and therefore a rise in money demand.
