Inflation dynamics

Abstract

The history of inflation in advanced economies offers important insights to newlinemacro economists. After remaining moderate during the earlier years, trend newlineinflation started drifting up in the late 1960s and peaked in the 1970s. Some newlineof the spike was attributed to volatile and transitory factors such as food newlineand oil, the latter on account of the energy crisis of the 1970s. Along with newlinethe headline, the trend inflation also increased suggesting that inflationary newlineexpectations and psychology were gradually taking root. Why was the trend newlineinflation allowed to drift up? This is largely attributed to the stance of monetary policy which was not sufficiently focused on keeping inflation low and newlinestable. newlineLearning from this episode, the decades since the 1980s brought about newlinesignificant shifts in the policy regime. A stronger institutional and monetary policy framework was put in place in advanced economies and emerging newlinemarkets. Concurrent with the improvement in the conduct of policy, inflation and inflation expectations declined and are today firmly anchored newlineat the targeted inflation ((Clarida et al., 2000, Romer and Romer, 2002, newlineBernanke, 2004, Mishkin, 2007)).1 That this has been achieved despite an newlineunprecedented and unconventional easing of policy speaks volumes about the newlinecredibility of policy. newline