The 2-regime view of inflation
This examine supplies a view of the inflation course of that’s complementary to the one captured in customary fashions, corresponding to these primarily based on the Phillips curve. It characterises the method as two regimes – a low- and a high-inflation regime – with self-reinforcing transitions from the low- to the high-inflation one. The examine paperwork the stylised info describing the 2 regimes and the transitions between them primarily based on disaggregated value dynamics and the joint behaviour of wages and costs. Two implications for financial coverage stand out. First, the desirability of conducting financial coverage in a versatile method in a low-inflation regime, tolerating average, even when persistent, deviations from narrowly outlined targets. Second, the significance of being pre-emptive when the chance of a transition to the high-inflation regime will increase, though assessing this transition in actual time stays difficult.
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