Monetary policy: How does inflation matter?

Posted: April 23, 2013 in economy
Tags: , ,

THE IMF’s recently published a thought-provoking analysis on changes in the apparent relationship between inflation and unemployment. I posted some thoughts on the work here. (It was also the subject of a Free exchange column.) I’ve since reflected more on the work, and on some related writing by Nick Rowe. And on this chart:

The chart shows four different gauges of inflation expectations. Three are mostly market driven. The University of Michigan measure comes from survey data; it is typically higher than other measures and responds more to commodity price swings (or really, oil price swings). Expectations swoon in late 2008 as everyone worries that the world is ending. Since that time there have been wiggles—the mid-2010 dip prompted the launch of QE2—but all of these series have been surprisingly stable, mostly flat, and mostly within a stone’s throw of 2%.The IMF notes the stability of inflation expectations and reckons that it is attributable to central bank credibility; from the early 1980s central banks convinced the public (with the help of a honking recession or two) that inflation in future would be generally low and stable. Inflation expectations became so well anchored that not even the worst few months of economic performance since the 1930s could produce deflation. I’ve been thinking about whether that narrative seems right.In September of …

via Economic Crisis http://www.economist.com/blogs/freeexchange/2013/04/monetary-policy-2?fsrc=rss

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