In a non-linear model with non-linear Taylor rule:
We can simulate a perfect foresight model from an old steady-state (\pi^*_1=0.02) to a new steady-state (\pi^*_2=0.01). Thus a 50% drop in the inflation target.
In a log-linearised model with a linear Taylor rule:
i_t = (i^* - \phi \pi^*) + \phi \pi_t
I can do something like the following?
model; pi_star = rho*pi_star(-1) + epsilon; initval; epsilon = 0; end; steady; endval; epsilon = (1-rho)*log(1 - 0.5); end;
Thus, in period 1, inflation target,
pi_star (\pi^*) decreases by 50% permanently. Sounds correct? Because in log-linearised models, typically there is no intercept in Taylor rule (in DYNARE). Thus, i_t = \phi \pi_t. Introducing ( (i^* - \phi \pi^*)) will cause problems? Or perhaps, disinflation simulations can only be done in a non-linear model? Thanks!