Determinants and Implications of Low Global Inflation Rates

57 Pages Posted: 1 Jan 2017

Date Written: December 30, 2016


In this paper we look at global inflation trends over the last decade and try to disentangle factors that could explain the ultra-low levels of inflation during the recovery from the Great Recession. We review the literature on the subject, which points at possible structural shifts in price and wage setting processes in recent decades, such as inflation’s reduced cyclical sensitivity to domestic economic slack, a bigger role being played by forward-looking inflation expectations, and the increased importance of global factors. We then test empirically whether changes in the coefficients of the Phillips curve in the wake of the global financial crisis can explain the behaviour of inflation over this period for a large group of advanced economies. Our results show a wide range of variation between countries, and in some cases the findings are insufficiently robust to offer a satisfactory explanation of the recent course of inflation. Nevertheless, the persistence of inflation and the increased importance of backward-looking inflation expectations in some countries may pose risks for inflation-expectation anchoring and central bank credibility. Finally, we review the adverse effects on the real economy of ultra-low inflation over an extended period and analyse the policy options for addressing this problem.

Keywords: inflation, inflation expectations, Phillips curve, monetary policy

JEL Classification: E31, E32, E50

Suggested Citation

Berganza, Juan Carlos and Del Rio Lopez, Pedro and Borrallo, Fructuoso, Determinants and Implications of Low Global Inflation Rates (December 30, 2016). Banco de Espana Occasional Paper No. 1608, Available at SSRN: or

Juan Carlos Berganza (Contact Author)

Banco de España ( email )

Madrid 28014
+34913388034 (Phone)
+34913386212 (Fax)

Pedro Del Rio Lopez

Banco de España ( email )

Madrid 28014

Fructuoso Borrallo

Banco de España ( email )

Alcala 50
Madrid 28014

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