Determinants and Implications of Low Global Inflation Rates

Juan Carlos Berganza (), Fructuoso Borrallo () and Pedro Río ()
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Juan Carlos Berganza: Banco de España
Fructuoso Borrallo: Banco de España
Pedro Río: Banco de España

A chapter in International Macroeconomics in the Wake of the Global Financial Crisis, 2018, pp 183-216 from Springer

Abstract: Abstract In this chapter we look at global inflation trends over the last decade and try to disentangle factors that could explain the ultra-low levels of inflation during the recovery from the Great Recession. We review the literature on the subject, which points at possible structural shifts in price and wage setting processes in recent decades, such as changes in inflation’s cyclical sensitivity to economic slack, in the role being played by forward-looking and backward-looking inflation expectations, or in the relevance of global factors. We then test empirically whether changes in the coefficients of the Phillips curve in the wake of the global financial crisis can explain the behaviour of inflation over this period for a large group of advanced economies. Our results show a wide range of variation between countries, and in some cases the findings are insufficiently robust to offer a satisfactory explanation of the recent course of inflation. Nevertheless, the persistence of inflation and the increased importance of backward-looking inflation expectations in some countries may pose risks for inflation-expectation anchoring and central bank credibility. Finally, we review the adverse effects on the real economy of ultra-low inflation over an extended period and analyse the policy options for addressing this problem.

Keywords: Global Inflation; Economic Slack; Inflationary Expectations; Cyclical Sensitivity; Phillips Curve (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:spr:fimchp:978-3-319-79075-6_10

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DOI: 10.1007/978-3-319-79075-6_10

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