Inflation Shocks and Disinflation: Stylised Facts from the Past 50 Years

Abstract

In our study, we examine the circumstances under which major inflation shocks lead to persistently high inflation. For our analysis, we use macroeconomic data from a broad sample of countries for the past fifty years or more. We identify several cases where inflation rises from the single-digit range to above 20 per cent, followed by successful disinflation within two years. Similarly, there are many examples where inflation remains high after an initial shock. The former cases are characterised by more pronounced increases in interest rates during inflation shocks, more disciplined fiscal policy and favourable commodity price developments. Examining the same sample, we also show that the disinflation after a period of persistently high inflation was not typically accompanied by a significant slowdown in the real economy and instead was often followed by higher economic growth. In the disinflationary episodes we identified, the size of the real cost of disinflation is negatively correlated with the central bank independence, suggesting that a disinflationary commitment played a positive role.