Is it all quiet on the inflation front?
The COVID-19 pandemic has the potential to have a significant impact on medium-run inflation expectations particularly if considered in conjunction with large fiscal stimuli, ultra-loose monetary policies and the risk of de-globalization. The recent review of monetary policy framework by the Federal Reserve, focusing on an average inflation target strategy, highlights how difficult it can be to keep inflation expectations well-anchored when secular factors are at play (i.e. decline in the neutral real rate of interest , r*) and a shock of the scale of COVID-19 hits the economy, with ensuing uncertainty. This blog post was written with my colleague Corrado Macchiarelli and also published on NIESR's blog and LSE's blog . Several factors could “in theory” light inflation expectations up over the medium-term There are many factors that play into the formation of inflation expectations. The large government stimuli, for instance, may have the effect of increasing the ba...