Understanding Lowflation

42 Pages Posted: 2 Oct 2018 Last revised: 7 Jan 2019

See all articles by David Andolfatto

David Andolfatto

Simon Fraser University (SFU) - Department of Economics; Federal Reserve Bank of St. Louis

Andrew Spewak

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Multiple version iconThere are 2 versions of this paper

Date Written: 2018-09-01

Abstract

Central banks are viewed as having a demonstrated ability to lower long-run inflation. Since the financial crisis, however, the central banks in some jurisdictions seem almost powerless to accomplish the opposite. In this article, we offer an explanation for why this may be the case. Because central banks have limited instruments, long-run inflation is ultimately determined by fiscal policy. Central bank control of long-run inflation therefore ultimately hinges on its ability to gain fiscal compliance with its objectives. This ability is shown to be inherently easier for a central bank determined to lower inflation than for a central bank determined to accomplish the opposite. Among other things, the analysis here suggests that for the central banks of advanced economies, any stated inflation target is more credibly viewed as a ceiling.

Keywords: Inflation, Inflation targeting, Fiscal policy

JEL Classification: E31, E52, E58, E62, E63

Suggested Citation

Andolfatto, David and Spewak, Andrew, Understanding Lowflation (2018-09-01). FRB St. Louis Working Paper No. 2018-24. Available at SSRN: https://ssrn.com/abstract=3258974 or http://dx.doi.org/doi.org/10.20955/wp.2018.024

David Andolfatto (Contact Author)

Simon Fraser University (SFU) - Department of Economics ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada
604 291-5825 (Phone)
604 291-5944 (Fax)

Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Andrew Spewak

Federal Reserve Banks - Federal Reserve Bank of St. Louis

411 Locust St
Saint Louis, MO 63011
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
15
Abstract Views
105
PlumX Metrics