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Determinants and implications of low global inflation rates

Author

Listed:
  • Juan Carlos Berganza

    (Banco de España)

  • Pedro del Río

    (Banco de España)

  • Fructuoso Borrallo

    (European Central Bank)

Abstract

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.

Suggested Citation

  • Juan Carlos Berganza & Pedro del Río & Fructuoso Borrallo, 2016. "Determinants and implications of low global inflation rates," Occasional Papers 1608, Banco de España.
  • Handle: RePEc:bde:opaper:1608
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    Cited by:

    1. Kristin Forbes, 2019. "Has globalization changed the inflation process?," BIS Working Papers 791, Bank for International Settlements.
    2. Ha, Jongrim & Kose, M. Ayhan & Ohnsorge, Franziska, 2023. "One-stop source: A global database of inflation," Journal of International Money and Finance, Elsevier, vol. 137(C).
    3. Simon Gilchrist & Egon Zakrajšek, 2020. "Trade Exposure and the Evolution of Inflation Dynamics," Central Banking, Analysis, and Economic Policies Book Series, in: Gonzalo Castex & Jordi Galí & Diego Saravia (ed.),Changing Inflation Dynamics,Evolving Monetary Policy, edition 1, volume 27, chapter 6, pages 173-226, Central Bank of Chile.
    4. Kristin Forbes, 2019. "Inflation Dynamics: Dead, Dormant, or Determined Abroad?," NBER Working Papers 26496, National Bureau of Economic Research, Inc.
    5. Fructuoso Borrallo Egea & Pedro del Río López, 2021. "Monetary policy strategy and inflation in Japan," Occasional Papers 2116, Banco de España.
    6. Fernando Zarzosa Valdivia, 2020. "Inflation Dynamics in the ABC (Argentina, Brazil and Chile) countries," Ensayos de Política Económica, Departamento de Investigación Francisco Valsecchi, Facultad de Ciencias Económicas, Pontificia Universidad Católica Argentina., vol. 3(2), pages 77-99, Octubre.
    7. Jašová, Martina & Moessner, Richhild & Takáts, Előd, 2020. "Domestic and global output gaps as inflation drivers: What does the Phillips curve tell?," Economic Modelling, Elsevier, vol. 87(C), pages 238-253.
    8. Fructuoso Borrallo Egea & Pedro del Río López, 2021. "Estrategia de política monetaria e inflación en Japón," Occasional Papers 2116, Banco de España.

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    More about this item

    Keywords

    inflation; inflation expectations; Phillips curve; monetary policy.;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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