A BEJM Topics article.

Abstract

Disinflations typically lead to recessions in actual economies. A classical policy issue is the choice between a cold-turkey and a gradualist approach to minimize the output loss associated with a period of disinflation. This paper explores which policy option is less costly in terms of foregone output through a menu cost model in which the credibility of government policies is the decisive factor in determining the appropriate speed of disinflation. It shows that, in the event of non-credibility, cold-turkey disinflation minimizes foregone output, whereas full credibility favors a gradualist approach.

Submitted: August 1, 2001 · Accepted: October 31, 2001 · Published: March 18, 2002

Originally published in Topics in Macroeconomics.

Recommended Citation

Loh, Sanguck (2002) "A Cold-Turkey versus a Gradualist Approach in a Menu Cost Model," Topics in Macroeconomics: Vol. 2 : Iss. 1, Article 1.
Available at: http://www.bepress.com/bejm/topics/vol2/iss1/art1