Escape dynamics and policy specification

Research output: Contribution to journalArticlepeer-review


In his monograph The Conquest of American Inflation (Princeton, NJ: Princeton University Press, 1999), Sargent suggests that the sharp reduction in U.S. inflation that took place under Volker may vindicate the type of econometric policy evaluation famously criticized by Lucas (Carnegie-Rochester Conference Series on Public Policy, 19-46, 1976). At the core of this vindication story is the escape dynamics, recurrent sliding away from the path leading to the time-consistent suboptimal equilibrium level of inflation and toward the low-inflation, optimal, time-inconsistent Ramsey outcome: by recurrently estimating a reduced-form model, in fact, the policy maker could periodically learn an approximate version of the natural rate hypothesis and therefore be induced to disinflate the economy. Two elements seem important in this story: the type of model used by the policy maker to represent the economy, whether structural or reduced-form, and the policy specification, whether derived taking the private sector's expectations as given or as endogenous to the policy design. Although Sargent (1999) stresses the first element, we find that it is instead the second aspect that is crucial to generate recurrent periods of low inflation: the policy maker has to recognize the endogeneity of the private sector's expectations and refrain from exploiting ephemeral short-run trade-offs between inflation and unemployment. Copyright © 2011 Cambridge University Press.
Original languageEnglish
Pages (from-to)123-142
Number of pages19
JournalMacroeconomic Dynamics
Issue number1
Publication statusPublished - Jan 2013


  • Escape Dynamics
  • Expectations
  • Learning
  • Policy Rule


Dive into the research topics of 'Escape dynamics and policy specification'. Together they form a unique fingerprint.

Cite this