The vertical lines indicate the beginning and end of disinflations
However, his results only indicate the obvious - the FED's decision regarding disinflation
is influenced by the outlook for unemployment as well as inflation.
5) According to Sargent, disinflations
are costly because they are often not credible: price setters do not believe announcements of slower money growth.
Both inflation rates are also lower than they were in 2010, during the country's last episode of disinflation
In particular, in the post-war United States, recessions are times of disinflation
Zhang (2005) found a negative relationship between sacrifice ratios and initial inflation rates, and the cost of reducing inflation is generally lower when the speed of disinflation
In his study on disinflations
in 18 Latin America and Caribbean countries, Hofstetter defines inflation history as a simple average of the inflation rate of the past 10 yr and examines the effect of inflation history on the sacrifice ratio.
So we can expect around 201 l, give or take a few months, the contractionary effects of a relatively synchronized global disinflation
policy, with few if any oases of growth.
In that setting, a higher proportion of agents with adaptive expectations generally slows down the disinflation
process but, as in Sargent (1999), it also allows for a lower long-run inflation rate.
On the basis of this result, in a bit of an overstatement, Ball concludes, "With credible policy and a realistic specification of stagger ing, quick disinflations
cause booms" (p.
We find that most episodes of serious financial instability in the United States were associated with disinflations
and that all large disinflations
, except those immediately following wars, were accompanied by financial instability.
Even after the Fed under Chairman Volcker had begun its momentous disinflation
, the Carter administration imposed credit controls in early 1980 in an effort to foster the process.
The third common element of the two disinflations
is that fiscal policies did not fully adjust in the required way.
1970s and 1980s, the ground gained in many of those disinflations
Particularly stark examples of this output cost were seen in the early 1980s and 1990s where disinflations
in both periods were accompanied by severe recessions.