Working Paper: NBER ID: w30555
Authors: Andrs Blanco; Pablo Ottonello; Tereza Ranosova
Abstract: We empirically characterize episodes of large inflation surges that have been observed worldwide in the last three decades. We document four facts. (1) Inflation following surges tends to be persistent, with the duration of disinflation exceeding that of the initial inflation increase. (2) Surges are initially unexpected but followed by a gradual catch-up of average short-term expectations with realized inflation. (3) Long-term inflation expectations tend to exhibit mild increases that persist throughout disinflation. (4) Policy responses are characterized by hikes in nominal interest rates but no tightening of real rates or fiscal balances. Our findings highlight the challenges monetary authorities face in avoiding persistent inflation dynamics following large inflation surges.
Keywords: inflation; monetary policy; fiscal policy; inflation expectations
JEL Codes: E31; E40; F40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| inflation surges (E31) | persistence of inflation (E31) |
| inflation surges (E31) | catch-up of short-term expectations (D84) |
| catch-up of short-term expectations (D84) | revert to pre-surge levels (P27) |
| inflation surges (E31) | long-term inflation expectations (E31) |
| inflation surges (E31) | monetary policy responses (E52) |
| persistence of inflation (E31) | high inflation rates for several years (E31) |