DISINFLATION WITH IMPERFECT CREDIBILITY

This paper presents a theory of the real effects of disinflation. As i n New Keynesian models, price adjustment is staggered across firms. As in New Classical models, credibility is imperfect: the monetary autho rity may not complete a promised disinflation. The combination of impe rfect credibility and staggering yields more plausible results than ei ther of these assumptions alone. In particular, an announced disinflat ion reduces expected output if credibility is sufficiently low.