Mai Hakamada
(IMF) and I have a new SUERF Policy Brief on Inflation Shocks and Policy Delay:
What are the Consequences of Falling Behind the Curve, available at https://www.suerf.org/publications/suerf-policy-notes-and-briefs/inflation-shocks-and-policy-delay-what-are-the-consequences-of-falling-behind-the-curve/.
Central banks in major industrialized economies
were slow to react to the surge in inflation that began in early 2021 and have
since faced difficulty taming persistent inflation. We evaluate the
consequences of such a delay in responding to a temporary but persistent
positive shock to inflation. Policy delay worsens inflation outcomes but can
mitigate or even reverse the output decline that occurs when policy responds
without delay; consequently, delay can make a recession less likely. Using a
measure of loss that incorporates a “balanced-approach” to weighing
fluctuations in inflation and the output gap, our research finds that loss is
monotonically increasing in the length of the delay. Loss is reduced if policy,
when it does react, does so more aggressively. The costs of a short delay can
be eliminated by adopting a less inertial and more aggressive response to
inflation.
The policy
brief summarizes the results from our March 2024 IMF Working Paper No. WP/24/42,
available at https://www.imf.org/en/Publications/WP/Issues/2024/03/01/The-Consequences-of-Falling-Behind-the-Curve-Inflation-Shocks-and-Policy-Delays-Under-545507.
