Navigating the Path to Economic Stability: Governor Jefferson’s Perspective on Managing Disinflationary Pressures
The Cost of Disinflation: A Review of the Literature
The paper I am discussing today is a timely review of the literature on the cost of disinflation for central bankers. The authors analyze historical disinflationary episodes in the United States and other countries to see what lessons we might learn from experience. They also present a simple, tractable model that relates interest rates, inflation, inflation expectations, and slack in the labor market. Finally, they advise monetary policymakers on how to address the current situation, that is, how to manage disinflation.
Takeaways from the Authors
Based on past disinflation episodes in the United States and abroad, the authors’ first takeaway is that policymakers should expect that disinflation will be costly in terms of foregone output or employment. They find that all 16 large policy-induced disinflations in the four advanced economies they study were associated with a recession. The authors also note that a higher initial inflation rate is associated with a lower sacrifice ratio. This finding is based on the argument that a high initial inflation rate enhances the plausibility of central banks’ willingness to incur the cost of reducing inflation.
My Takeaways
My takeaway from this paper is that disinflation is difficult and costly. It requires careful judgment and a willingness to accept the short-term costs of reducing inflation. The authors’ findings are consistent with the experience of other countries and the United States. They also suggest that the initial inflation rate is an important factor in determining the cost of disinflation.
Related Facts
The authors’ findings are consistent with the experience of other countries and the United States. In the United Kingdom, for example, the disinflationary episode of the early 1980s was associated with a significant recession. Similarly, in the United States, the Volcker disinflation of 1981–82 resulted in a painful recession, although the reduction in inflation was large.
Key Takeaway
The key takeaway from this paper is that disinflation is a difficult and costly exercise. It requires careful judgment and a willingness to accept the short-term costs of reducing inflation. The authors’ findings suggest that the initial inflation rate is an important factor in determining the cost of disinflation.
Conclusion
In conclusion, this paper provides an important review of the literature on the cost of disinflation. It is a timely reminder for central bankers charged with managing disinflation. The authors’ analysis is thorough, and their takeaways are well-reasoned. My takeaway is that disinflation is a difficult and costly exercise. It requires careful judgment and a willingness to accept the short-term costs of reducing inflation. The authors’ findings suggest that the initial inflation rate is an important factor in determining the cost of disinflation.
