Inflation Dynamics in Stable and Unstable Policy Regimes: Comment on 'Deflating Inflation Expectations'

The 2017 U.S. Monetary Policy Forum paper presents a useful framework to characterize the dynamics of inflation in the United States since 1984. A key finding of the paper is that the usual determinants of inflation fluctuations, such as inflation expectations and resource slack, add little to the forecasting ability of the authors’ model. In other words, if inflation continues to be determined as it was over their sample period, we should continue to see similar stability in inflation trends. It’s likely, however, that the stability during their sample period resulted from effective monetary policy. Policymakers have an interest in understanding transitions from periods of stability to periods of instability. Looking back to the conduct of monetary policy during the 1960s—a period that bears some resemblance to today—illustrates how it is possible to depart from a period of stability. A key difference between the 1960s and today, however, is greater recognition of the importance of acting pre-emptively to combat inflation and the importance of central bank independence.