Why are some attempts at disinflation very successful and others failures?
This is the question that Christina Romer and David Romer ask in this paper. They argue that decisions to disinflate are dynamic as monetary policymakers can strengthen policy if they are not achieving the desired fall in inflation. As a result, a fundamental “determinant of whether disinflations are successful must lie with the motivation and decisions of policymakers.” The authors analyze the narrative record of the FOMC’s policy discussions and identify nine times since World War II when Federal Reserve policymakers took contractionary actions to reduce inflation. In both 1958 and 1979/1981, when policymakers were highly committed to disinflation, inflation not only came down, but stayed down for an extended period. In contrast, when policymakers were only weakly committed, such as in 1968 and 1978, inflation fell little and soon rebounded.
Romer and Romer further identify two potential channels through which higher commitment to disinflation fosters success: a) by lowering expected inflation and b) by avoiding premature easing.
- They examine if the differences in commitment, evident in the confidential policy discussions, were likely known to market participants and ordinary citizens at the time and concluded they were. In both 1958 and 1979/81 media, and in particular the New York Times, ran articles emphasizing the Federal Reserve’s determination to eliminate not just inflation but the belief that any inflation was normal. This was not the case in 1978.
- They examine the issue of premature easing by following the discussion in policy meetings from the decision to disinflate through to the decision to ease or greatly weaken the disinflationary policy. Romer and Romer find that in some cases the disinflationary policy was ended because inflation had been reduced to the desired level, but in many others the policy was abandoned despite concern that inflation was still too high. The motivation for premature easing was the perception that output costs were too high, and that monetary policy had done its part and it was time for non-monetary approaches.
How about the current inflationary episode?
[T]he overall weight of the currently available evidence points to the Federal Reserve being strongly committed to reducing inflation—similar to its commitment in the 1958, 1979, and 1981 episodes. We cannot rule out the possibility of a major financial, fiscal, or geopolitical crisis or political or institutional upheaval that will make history a poor guide to the current episode. But based on history, the most likely outcome of today’s attempt at disinflation is that monetary policymakers will persevere in their disinflationary efforts until they have brought inflation down to, or very close to, their long-run target.
Lessons from history for successful disinflation
Authors: Christina D. Romer, David H. Romer
From: University of California, Berkeley
Disinflation in EU
In his speech titled “Disinflation in the euro area: an update,” delivered at the University College Dublin Economics Society on April 15, 2024, Philip R. Lane, a Member of the Executive Board of the European Central Bank (ECB), reviewed the recent evolution of inflation in the euro area. Among the main points:
- The current phase of disinflation is necessarily bumpy. In particular, the swings in energy prices during 2023 will generate oscillations in base effects in the monthly inflation readings, while the staggered reversal of various temporary fiscal supports will also operate on the price level in an uneven manner. Headline inflation is expected to fluctuate around current levels in the near term on account of base effects in the energy component and the reversal of the upward effect of the early timing of Easter on services inflation in March. While services inflation should decline somewhat in the near term, it is expected to remain relatively elevated for most of this year.
- The projected convergence of inflation to the target in 2025 will be underpinned by: the lowering of labor cost pressures; some additional compression of unit profits; the dissipation of the adverse effects of past energy shocks, supply bottlenecks and the pandemic re-opening; and the further unfolding of the disinflationary impact of the restrictive monetary policy stance.
Disinflation in the euro area: an update
By: Philip R. Lane – ECB
