Abstract
In this paper, three possible reasons are examined for a sluggish inflation response to a hard-currency peg. Models of overlapping wage contracts are analyzed and shown to generate little inertia. These findings are contrasted with the effects of government credibility and the speed of private sector learning, which are shown to have a major impact on the speed of inflation adjustment. But even if individual agents believe the government will not devalue its currency, it is shown that inflation inertia can still arise if these expectations are not common knowledge.
| Original language | English |
|---|---|
| Pages (from-to) | 178-201 |
| Number of pages | 24 |
| Journal | Staff Papers - International Monetary Fund |
| Volume | 40 |
| Issue number | 1 |
| Publication status | Published - Mar 1993 |