Andrés Blanco, Pablo Ottonello, and Tereza Ranošová
Working Paper 2024-9
September 2024
Abstract:
We empirically characterize episodes of large inflation surges that have been observed worldwide in the last three decades. We document four facts. (1) Inflation surges tend to be persistent, with the duration of disinflation exceeding that of the initial inflation increase. (2) Surges are initially unexpected but followed by a gradual catch-up of average short-term expectations with realized inflation. (3) Long-term inflation expectations tend to exhibit increases that persist throughout disinflation. (4) Policy responses are characterized by hikes in nominal interest rates but no tightening of real rates or fiscal balances. In sum, episodes of large and persistent inflation tend to occur with government responses that depart from the prescriptions of textbook policy rules, and that instead exhibit a "fear of tightening."
JEL classification: E31, E40, F40
Key words: inflation surges, inflation expectation, fiscal and monetary policy
https://doi.org/10.29338/wp2024-09
The authors are grateful to the editor, Olivier Coibion, and three anonymous referees for valuable suggestions. They thank Guillermo Calvo, Mark Gertler, Yuriy Gorodnichenko, John Leahy, and Bruce Preston for their useful comments and suggestions. Emilio Colombi, Franco Nunez, and Nicolas Oviedo provided excellent research assistance. This research was partly funded by the Michigan Institute for Teaching and Research in Economics project, "The Nominal Anchor: Measurement and Theory."" The views here are those of the authors and not the Atlanta Fed or the Federal Reserve System. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
Please address questions regarding content to Andrés Blanco, Federal Reserve Bank of Atlanta; Pablo Ottonello, University of Maryland and NBER; or Tereza Ranošová, Deutsche Bundesbank.
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