Changing inflation dynamics, evolving monetary policy: an overview

Abstract

Understanding the dynamics of inflation has become an important challenge for both policymakers and researchers over the past decade. Empirical models linking inflation and economic activity—versions of the so-called Phillips curve—have failed to account for the behavior of inflation in many advanced economies. In particular, inflation in the U.S. and other countries was higher during the 2008-2009 Great Recession than the conventional empirical Phillips curve would imply. As noted by some economists, this “missing deflation” phenomenon may have already started in the mid-2000s. Just as puzzling, during the subsequent recovery, inflation has remained subdued relative to the predictions generated by existing models, despite the aggressive expansionary monetary policies implemented in many advanced economies.