The dynamic effects of disinflation policies in the U.S.

Abstract

This paper investigates the effects of disinflation policies on key macroeeonomic variables. Using postwar US data and episode techniques, we identify disinflation shocks as shocks that drive the inflation rate to a lower level in the long-run. We find that in the immediate aftermath of a disinflation policy, the economy enters in a persistent recession. The inflation rate increases above its long-run level and exhibits a positive hump-shaped response. A similar pattern is found for the nominal interest rate, which responds even more strongly in the short-run. The results are found to be robust to changes in the set of variables included in the empirical analysis, as well as changes in the specification of the model.