Unconventional Monetary Policy and Inflation in the U.S.: How Much Inflation was Missing?

CIEF Documentos de trabajo Economía y Finanzas N° 20-11

13 Pages Posted: 8 Apr 2020

See all articles by Carlos Esteban Posada

Carlos Esteban Posada

Universidad EAFIT

Alejandro Torres

Universidad EAFIT - School of Economics and Finance - Center for Research in Economic & Finance (CIEF)

Alfredo Villca

Universidad EAFIT

Date Written: March 13, 2020

Abstract

The U.S. inflation rate for the period 2008-2016 was abnormally low despite the execution of a high expansive monetary policy, which has been called “the missing inflation paradox”. In this paper we estimate the missing inflation as the difference between the inflation predicted, and the observed rate using two monetarist models. The results support the adequacy of this approach to explain the inflation during 1970-2005. However, after that, the estimated missing inflation was around 3.5%-3.9% annually on average. Interestingly, this phenomenon apparently starts in 2006, previous to the beginning of the Great Recession. Although we do not present a formal explanation, the models used allow us to suspect the existence of an unusually high (and transitory) increase in the demand for real money balances.

Keywords: inflation, missing inflation, monetary policy, money demand

JEL Classification: C51, E31, E51, E52, E41

Suggested Citation

Esteban Posada, Carlos and Torres, Alejandro and Villca, Alfredo, Unconventional Monetary Policy and Inflation in the U.S.: How Much Inflation was Missing? (March 13, 2020). CIEF Documentos de trabajo Economía y Finanzas N° 20-11 , Available at SSRN: https://ssrn.com/abstract=3553965 or http://dx.doi.org/10.2139/ssrn.3553965

Carlos Esteban Posada (Contact Author)

Universidad EAFIT ( email )

Carrera 49 N° 7 sur – 50
Bogotá, Antioquia 00000
Colombia

Alejandro Torres

Universidad EAFIT - School of Economics and Finance - Center for Research in Economic & Finance (CIEF) ( email )

Carrera 49 No. 7 South - 50
Bogotá
Colombia

Alfredo Villca

Universidad EAFIT ( email )

Carrera 49 N° 7 sur – 50
Bogotá, Antioquia 00000
Colombia

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