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The Dynamics of Large Inflation Surges

Andrés Blanco¹; Pablo Ottonello²; Tereza Ranošová³

¹ Federal Reserve of Atlanta [email protected] · ² University of Maryland and NBER [email protected] · ³ Deutsche Bundesbank [email protected]

Abstract We empirically characterize episodes of large inflation surges observed worldwide in the last three decades. We document four facts. (1) Inflation surges tend 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 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, departing from textbook policy rules, and instead exhibiting a “fear of tightening.”

DOI

10.1162/rest_a_01568

Pages

1-31

Language

en

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