Contacts, Credibility and Common Knowledge: Their Influenceon Inflation Convergence
March 1, 1992
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Summary
In this paper three possible reasons are examined for a sluggish inflation response to a hard currency peg. Models of overlapping wage contracts are analyzed and shown to generate little inertia. This contrasts with the effects of government credibility and the speed of private sector learning, which are shown to have a major impact on the speed of inflation adjustment. But even if individual agents believe the government will not devalue, it is shown that inflation inertia can still arise if these expectations are not common knowledge.
Subject: Conventional peg, Economic theory, Exchange rates, Foreign exchange, Inflation, Inflation persistence, Prices, Rational expectations
Keywords: Conventional peg, current price price level, exchange rate, exchange rate peg, Exchange rates, Inflation, inflation inertia, Inflation persistence, price level, price level jump, price level rate, price level rising, Rational expectations, WP
Pages:
24
Volume:
1992
DOI:
Issue:
026
Series:
Working Paper No. 1992/026
Stock No:
WPIEA0261992
ISBN:
9781451981773
ISSN:
1018-5941
Notes
Also published in Staff Papers, Vol. 40, No. 1, March 1993.
