From the chapter with a witty opening quote from Silver Blaze, here's a small excerpt from the forthcoming WEO which has a whole chapter (about time too!) devoted to inflation or in their own words - the dog that didn't bark, forget bite!
I just wanted to get in a quick reasoning on the whole inflationary quiescence in an era of unprecedented and unconventional monetary accommodation. But before that, here's a nice graph from the chapter that shows the staggered short-medium run behavior over the long-term between inflation and unemployment. As expected, it differentiates between the GFC and the rest - the '70-'79 decade is characterized by that vertical spike while the GFC has a horizontal extension closer to the principal axis:
The fund begins by looking at a New-Keynesian framework of a Phillips curve variant. It assumes that inflation (p(t)) is impacted by inflation expectations (pe(t)) and the level of cyclical unemployment (u(t)) (you can leave the cyclical/structural debate for later!).
So, p(t) = (pe(t)) - k.u(t)
where k is the parameter that is the slope of the curve. Using this basic framework, the following explanations can then be discussed retrospectively.
First - if the increase in unemployment had a dominant structural component instead of a cyclical one, then the change in u(t) will have little impact on p(t).
Second - (Bernanke might have a lot more to say on this), inflationary expectations may well be a lot more anchored than people presume they are. This could be a direct or indirect result of the difference in perspective of central bank credibility.
Third - prior to the GFC, inflation was still the dog that didn't bark and this initial level or "other changes" could well have impacted the response mechanism of inflation to cyclical developments. That is, you would expect a somewhat flatter curve and hence, a smaller coefficient for the slope (k).
I'll get more wonkish on this (as they do), tomorrow.
I just wanted to get in a quick reasoning on the whole inflationary quiescence in an era of unprecedented and unconventional monetary accommodation. But before that, here's a nice graph from the chapter that shows the staggered short-medium run behavior over the long-term between inflation and unemployment. As expected, it differentiates between the GFC and the rest - the '70-'79 decade is characterized by that vertical spike while the GFC has a horizontal extension closer to the principal axis:
The fund begins by looking at a New-Keynesian framework of a Phillips curve variant. It assumes that inflation (p(t)) is impacted by inflation expectations (pe(t)) and the level of cyclical unemployment (u(t)) (you can leave the cyclical/structural debate for later!).
So, p(t) = (pe(t)) - k.u(t)
where k is the parameter that is the slope of the curve. Using this basic framework, the following explanations can then be discussed retrospectively.
First - if the increase in unemployment had a dominant structural component instead of a cyclical one, then the change in u(t) will have little impact on p(t).
Second - (Bernanke might have a lot more to say on this), inflationary expectations may well be a lot more anchored than people presume they are. This could be a direct or indirect result of the difference in perspective of central bank credibility.
Third - prior to the GFC, inflation was still the dog that didn't bark and this initial level or "other changes" could well have impacted the response mechanism of inflation to cyclical developments. That is, you would expect a somewhat flatter curve and hence, a smaller coefficient for the slope (k).
I'll get more wonkish on this (as they do), tomorrow.
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