Do Institutional Factors Matter for the Speed of Disinflation?

A central issue for macroeconomic policy is the optimal speed of disinflation. The cold turkey view states that a credible disinflation is less costly if it is quick. An alternative view is that gradualism is less costly because of frictions in wage and price setting. Institutional factors, such as central bank independence or labor market structure, are argued to be important in influencing expectations or wage responsiveness. The paper examines whether various institutional factors explain the disinflation path taken by 21 OECD countries. The cross country analysis finds that institutional factors have no influence on the speed of disinflation; most important is the level of inflation before the disinflation.