What are the pros and cons of using cold turkey disinflation compared to a policy of gradualism?
What will be an ideal response?
Cold turkey disinflation reduces inflation quickly and could be successful if expected inflation fell at the same time; that requires that policy be credible, however. But Keynesians suggest that menu costs and nominal wage contracts will prevent prices and wages from adjusting quickly, so a cold turkey strategy will cause a recession. Further, if a cold turkey strategy is begun, but people think the costs will be so large that the strategy will be abandoned, then expected inflation will not decline. For this reason, Keynesians prefer a gradualist approach to allow wages and prices more time to adjust to policy changes. Such a policy is more likely to be sustainable politically.
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