The Low Inflation 'Puzzle' and Financial Crises

48 Pages Posted: 6 Dec 2019 Last revised: 20 Dec 2019

Date Written: November 22, 2019

Abstract

Low and unresponsive inflation has been termed a “puzzle.” The paper describes a formula for which these conditions have been a prediction since early 2016.

The Money Value Formula analyzes the unit value of a currency solely as a function of long lags of monetary aggregates. The Formula produces a significant statistical explanation for virtually all variability of forward long-term inflation. Its U.S. inflation forecasts are comparable to recognized leaders in accuracy with potential applicability to international economies as well.

Inflation Elasticity, the responsiveness of inflation to monetary stimulus, is derived from the Formula and becomes increasingly inelastic at a geometric rate, explaining central banks’ difficulty attaining targets. The onset of financial crises in four major advanced economies is linked to unanticipated real monetary expansion as economies transition from elastic to inelastic inflation with disinflation spurring unsustainable credit growth for central banks, banking systems, and entire economies.

Keywords: Inflation, inflation forecasts, monetary policy, central banks, money supply

JEL Classification: E17, E31, E37, E40, E42, E47, E51, E52, E58

Suggested Citation

Carr, Douglas, The Low Inflation 'Puzzle' and Financial Crises (November 22, 2019). Available at SSRN: https://ssrn.com/abstract=3491863 or http://dx.doi.org/10.2139/ssrn.3491863

Douglas Carr (Contact Author)

Carr Capital Co. ( email )

36 Hyde Lane
Westport, CT 06880
United States
203-256-9980 (Phone)

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