Dealing With Deflation Bias Through a Dismissal Contract
Keywords
Loading...
Authors
Issue Date
2022-08-17
Language
en
Document type
Journal Title
Journal ISSN
Volume Title
Publisher
Title
ISSN
Volume
Issue
Startpage
Endpage
DOI
Abstract
I study the use of a dismissal contract to reduce deflation bias caused by the existence of the zero-lower bound. It is found that a dismissal contract which states that the central banker will be fired if inflation is lower than a critical value is able to reduce deflation bias, in both states in which the zero-lower bound is binding and states in which the zero-lower bound is not binding. This critical value should reduce as the output gap increases, in order to incentivize the central banker to prioritize reducing deflation. Furthermore, it is confirmed that inflation expectations are the mechanism through which the zero lower bound constraint affects output and inflation even in states of the economy in which the zero-lower bound is not binding. Imposing a zero-lower bound on inflation expectations removes the effect of the zero-lower bound constraint on output and inflation in states of the economy in which the zero-lower bound constraint is not binding.
Description
Citation
Supervisor
Faculty
Faculteit der Managementwetenschappen