Determinants and implications of low global inflation rates
Juan Carlos Berganza (),
Pedro del Río () and
Fructuoso Borrallo ()
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Fructuoso Borrallo: European Central Bank
No 1608, Occasional Papers from Banco de España, Occasional Papers Homepage
In this paper 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 inflation’s reduced cyclical sensitivity to domestic economic slack, a bigger role being played by forward-looking inflation expectations, and the increased importance 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: inflation; inflation expectations; Phillips curve; monetary policy. (search for similar items in EconPapers)
JEL-codes: E31 E32 E50 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bde:opaper:1608
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