The ex ante credibility of disinflation policy and the cost of reducing inflation

This paper contains an empirical study of the effects of credibility on the cost of disinflation. The analysis is based on a dataset composed of seven ty-two disinflation episodes from 19 OECD countries. We measure the "ex ant e credibility" of a disinflation episode as the probability of a successful disinflation conditional on economic and political factors known to privat e agents on the eve of the disinflation. Under a variety of empirical speci fications we find that more credible disinflations are associated with smal ler losses in aggregate output.