Transitional and Steady‐state Costs of Disinflattion When Growth is Endogenou

Abstract

In a monetary version of the Uzawa (1965)–Lucas (1988) model of endogenous growth, this paper illustrates how a credible policy of rapid disinflation can induce temporary declines in employment and output, with the former exhibiting a significant degree of persistance; however, these temporary declines in employment and output are not associated with any nominal rigidities in the economy, and therefore do not represent dead‐weight losses thhat occur along the transitio path, but are instead a part of an optimal response to the policy change. The measured welfare benefits of disinflation are seen to be higher when the transition path is taken into account.