A SIMPLE-MODEL OF DISINFLATION AND THE OPTIMALITY OF DOING NOTHING

This paper analyses the optimal monetary policy of a government facing an election, whose disinflationary 'abilities' are uncertain, under t he assumption that reducing inflation is costly because of backward-lo oking contracts. It is shown that if the government likes to be in pow er it can choose to 'do nothing' on the inflation front in order to av oid risking electoral defeat should disinflation prove too costly. The costs of inflation reduction are worth bearing if initial inflation i s sufficiently high: therefore it is possible to observe quick disinfl ations that however stop short of low inflation.