Did the global financial crisis and the pandemic induce persistent deflation avoidance in major central banks?

Alex Cukierman

No 17384, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Major western central banks, such as the Fed and the ECB, reacted very mildly or not at all to the return of inflation since the second half of 2020. The huge balance sheets accumulated by those central banks over the global financial crisis and the pandemic are still at elevated levels and the recent correlation between inflation and the real exante policy rate is negative rather than positive violating Taylor’s principle. The paper argues that at least part of those findings are due to the emergence of recession avoidance (RA) preferences at those central banks in the aftermath of the two crises. In the face of uncertainty such preferences assign higher importance to downward shocks to the output gap than to upward shocks to the inflation gap relatively to preferences that are symmetric in both gaps. The fact that prior to the global financial crisis and the pandemic the Fed and the ECB reacted in line with the prescription of Taylor’s principle yields additional support for this conclusion. The paper discusses the extent to which this asymmetry in central bank preference is likely to persist in light of the longer run changes in monetary institutions and policies triggered by the two crises. Chinese monetary policy over the two crises was expansionary albeit to a lesser extent than those of the Fed and the ECB. RA preferences emerged in Japanese monetary policy long before, and intensified with, the outbreak of the last two crises. By contrast in countries with permanently loose monetary policies such as Argentina the main concern of the CB over the two crises remained inflation as was the case long before they occurred.

Keywords: Recession avoidance; Inflation; Policy rates in aftermath of pandemic and global financial crisis (search for similar items in EconPapers)
JEL-codes: E3 E4 E5 F3 (search for similar items in EconPapers)
Date: 2022-06
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP17384 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

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:cpr:ceprdp:17384

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP17384

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().