{
  "title": "History's Inflation Lessons",
  "sourceUrl": "https://www.imf.org/en/publications/fandd/issues/2023/12/history-inflation-lessons-ari-ratnovski",
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  "summary": "A study of 100 inflation shocks since the 1970s provides valuable pointers for policymakers today",
  "sections": [
    {
      "heading": "Overview",
      "content": "- A study of 100 inflation shocks since the 1970s provides the basis for the analysis.\n- The article draws on IMF Working Paper 2023/190, “One Hundred Inflation Shocks: Seven Stylized Facts,” by Anil Ari, Carlos Mulas-Granados, Victor Mylonas, Lev Ratnovski, and Wei Zhao.\n- Contextual points from recent history:\n  - World inflation reached historic highs in 2022 after Russia’s invasion of Ukraine triggered a terms-of-trade shock akin to that of the 1970s.\n  - In advanced economies, prices rose at the fastest pace since 1984.\n  - In emerging market and developing economies, the price increase was the largest since the 1990s.\n  - Headline inflation in the United States and across much of Europe has halved from about 10 percent last year to less than 5 percent today."
    },
    {
      "heading": "Key empirical findings",
      "content": "- Inflation persistence:\n  - It takes years to “resolve” inflation by reducing it to the rate that prevailed before the initial shock.\n  - 40 percent of countries in the study failed to resolve inflation shocks even after five years.\n  - It took the remaining 60 percent an average of three years to return inflation to pre-shock rates.\n- Patterns of premature easing:\n  - Nearly 30 countries in the sample (including Denmark, France, Greece, and the United States) loosened policy prematurely after the 1973 oil-price shock.\n  - 90 percent of countries that failed to resolve inflation saw price growth slow sharply in the first few years after an initial shock, only to accelerate again or become stuck at a faster pace.\n- Policy stance and outcomes:\n  - Countries that successfully resolved inflation tightened macroeconomic policies more in response to the inflation shock and maintained a tight policy stance consistently over a period of several years (examples include Italy and Japan after the 1979 oil-price shock)."
    },
    {
      "heading": "Policy lessons and recommendations",
      "content": "- Consistency and credibility:\n  - Maintain a tight policy stance consistently over several years rather than loosening policy after initial declines in inflation.\n  - Policy credibility matters: countries where inflation expectations were more firmly anchored, or where central banks had past success maintaining low and stable inflation, were more likely to defeat inflation.\n- Monetary–fiscal interaction:\n  - Central bankers are on the front line, but governments must not make the task harder by adding to price pressures with loose fiscal policy.\n  - To make fiscal support during a cost-of-living crisis less inflationary, governments should target relief to the most vulnerable.\n- Labor market focus:\n  - Remain focused on real wages, not nominal wages, when responding to developments in the labor market.\n  - Historically, countries that resolved inflation successfully tended to have lower nominal wage growth; this did not translate into lower real wages because lower nominal wage growth accompanied lower price growth.\n  - Watch for the risk that wage growth needed to catch up with past declines in real wages could fuel inflation or lead to wage-price spirals if too high."
    },
    {
      "heading": "External stability and exchange rates",
      "content": "- Countries that resolved inflation successfully were better at maintaining external stability:\n  - Free-floating currencies were less likely to depreciate sharply.\n  - Currency pegs were more likely to survive.\n- This pattern reflects success in fighting inflation through tighter monetary policy and greater policy credibility, rather than a prescription for currency intervention."
    },
    {
      "heading": "Growth, unemployment, and welfare implications",
      "content": "- Short-term vs. medium/long-term trade-offs:\n  - Historically, countries that resolved inflation had lower economic growth in the short term than those that did not.\n  - Five years after the inflation shock, countries that resolved inflation had higher growth and lower unemployment than economies that allowed inflation to linger.\n- Cumulative costs:\n  - Cumulative welfare losses from unresolved or permanently high inflation dominate over the medium to long term.\n  - Allowing inflation to linger leads to accumulating costs of macroeconomic instability and inefficiency."
    },
    {
      "heading": "Central message for policymakers",
      "content": "- Fighting inflation is a marathon, not a sprint:\n  - Policymakers must persevere, demonstrate policy credibility and consistency, and keep their eyes on returning inflation firmly to target.\n  - History suggests that inflation’s recent decline could be transitory; policymakers should avoid celebrating too soon.\n\nHistory’s Inflation Lessons, ANIL ARI and LEV RATNOVSKI, F&D Magazine, December 2023.\n\n---\n\n Content in this bundle\n\n- F&D:  History’s Inflation Lessons\n  - F&D:  History’s Inflation Lessons (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - F&D:  History’s Inflation Lessons (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/fandd/issues/2023/12/history-inflation-lessons-ari-ratnovski"
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    "Authors: ANIL ARI, LEV RATNOVSKI",
    "Published: December 1, 2023",
    "A study of 100 inflation shocks since the 1970s provides the basis for the analysis.",
    "The article draws on IMF Working Paper 2023/190, “One Hundred Inflation Shocks: Seven Stylized Facts,” by Anil Ari, Carlos Mulas-Granados, Victor Mylonas, Lev Ratnovski, and Wei Zhao.",
    "Contextual points from recent history:",
    "Inflation persistence:",
    "Patterns of premature easing:",
    "Policy stance and outcomes:",
    "Consistency and credibility:",
    "Monetary–fiscal interaction:",
    "Labor market focus:",
    "Countries that resolved inflation successfully were better at maintaining external stability:",
    "This pattern reflects success in fighting inflation through tighter monetary policy and greater policy credibility, rather than a prescription for currency intervention.",
    "Short-term vs. medium/long-term trade-offs:",
    "Cumulative costs:",
    "Fighting inflation is a marathon, not a sprint:",
    "**F&D:  History’s Inflation Lessons**"
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