Good Policy or Good Luck? Why Inflation Fell Without a Recession

Thomas Ferguson and Servaas Storm (s.t.h.storm@tudelft.nl)
Additional contact information
Thomas Ferguson: Institute for New Economic Thinking
Servaas Storm: Delft University of Technology

No inetwp227, Working Papers Series from Institute for New Economic Thinking

Abstract: This paper analyzes claims that the Federal Reserve is principally responsible for the decline of inflation in the U.S. We compare several different quantitative approaches. These show that at most the Fed could plausibly claim credit for somewhere between twenty and forty percent of the decline. The paper then examines claims by central bankers and their supporters that a steadfast Fed commitment to keeping inflationary expectations anchored played a key role in the process. The paper shows that it did not. The Fed's own surveys show that low-income Americans did not believe assurances from the Fed or anyone else that inflation was anchored. Instead, what does explain much of the decline is the simple fact that most workers nowadays cannot protect themselves by bargaining for higher wages. The paper then takes up the obvious question of why steep rises in interest rates have not so far led to big rises in unemployment. We show that recent arguments by Benigno and Eggertson that shifts in vacancy rates can explain this are inconsistent with the evidence. The biggest factor in accounting for the strength in the economy is the continuing importance of the wealth effect in sustaining consumption by the affluent. This arises, as we have emphasized in several papers, from the Fed's quantitative easing policies. Absent sharp declines in wealth, the continuing importance of this factor is likely to feed service sector inflation in particular.

Keywords: Inflation; wage-price spiral; inflation expectations; effectiveness of monetary tightening; Phillips curve; central bank credibility; labor market tightness; real earnings growth; earnings uncertainty; the Beveridge ratio; wealth; wealth effect on consumption; affluent consumption; services inflation. (search for similar items in EconPapers)
JEL-codes: E0 E5 E6 E62 I12 J08 O23 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2024-09-25
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mon and nep-pke
References: Add references at CitEc
Citations:

Published

Downloads: (external link)
https://doi.org/10.36687/inetwp227 First version, 2024 (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:thk:wpaper:inetwp227

DOI: 10.36687/inetwp227

Access Statistics for this paper

More papers in Working Papers Series from Institute for New Economic Thinking Contact information at EDIRC.
Bibliographic data for series maintained by Pia Malaney (pmalaney@ineteconomics.org).