The two-regime view of inflation

Claudio Borio, Marco Lombardi, James Yetman and Egon Zakrajšek ()

No 133 in BIS Papers from Bank for International Settlements

Abstract: This study provides a view of the inflation process that is complementary to the one captured in standard models, such as those based on the Phillips curve. It characterises the process as two regimes – a low- and a high-inflation regime – with self-reinforcing transitions from the low- to the high-inflation one. The study documents the stylised facts describing the two regimes and the transitions between them based on disaggregated price dynamics and the joint behaviour of wages and prices. Two implications for monetary policy stand out. First, the desirability of conducting monetary policy in a flexible manner in a low-inflation regime, tolerating moderate, even if persistent, deviations from narrowly defined targets. Second, the importance of being pre-emptive when the risk of a transition to the high-inflation regime increases, even though assessing this transition in real time remains challenging.

Date: 2023 Written 2023-03
ISBN: 978-92-9259-627-9
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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