Understanding Lowflation

David Andolfatto () and Andrew Spewak

No 2018-24, Working Papers from Federal Reserve Bank of St. Louis

Abstract: Central banks are viewed as having a demonstrated ability to lower long-run inflation. Since the financial crisis, however, the central banks in some jurisdictions seem almost powerless to accomplish the opposite. In this article, we offer an explanation for why this may be the case. Because central banks have limited instruments, long-run inflation is ultimately determined by fiscal policy. Central bank control of long-run inflation therefore ultimately hinges on its ability to gain fiscal compliance with its objectives. This ability is shown to be inherently easier for a central bank determined to lower inflation than for a central bank determined to accomplish the opposite. Among other things, the analysis here suggests that for the central banks of advanced economies, any stated inflation target is more credibly viewed as a ceiling.

Keywords: Inflation; Inflation targeting; Fiscal policy (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 E62 E63 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2018-09-01
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Published in Federal Reserve Bank of St. Louis Review

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Journal Article: Understanding Lowflation (2019)
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DOI: 10.20955/wp.2018.024

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