Explaining the Post-pandemic Inflation Dynamics: Back to Wicksell?

In the aftermath of the 2020 pandemics, monetary policy has been tightened owing to the unpreceeding return of inflation in many advanced economies. In this quest for stability, a renew of interest emerged concerning the concept of natural rate of interest in the footsteps of Knut Wicksell’s works. Setting nominal short-term rates to target a low inflation rate under a policy rule has always been presented as the three building blocks of a Wicksellian monetary policy fashion (Lavoie and Seccareccia, 2004; Clinton, 2006). However, the Wicksellian label was more motivated by the monetary policy rule making and the effectiveness of short-term rates to fight price level instability, rather than paying attention to the natural rate of interest as a policy guide for tracking inflation (deflation). It seems that the situation has changed following the pandemics. The return of inflation in 2020, mostly due to chain-value gluts and supply shocks at large, pushed academics and policymakers to examine new framework and key concepts for understanding inflation dynamics. In this veil, a renew of interest emerged for the natural rate of interest as the Bank for International Settlement (BIS) did quite recently. It is, thus, a good opportunity to come back, or to discover, the leading contributions made by Wicksell as Professor Trautwein contributed in many ways to do all along his career.