Changing Central Bank Pressures and Inflation

Abstract

We introduce a simple long-run aggregate demand and supply framework for evaluating long-run inflation. The framework illustrates how exogenous economic and political economy factors generate pressures that, in the presence of central bank discretion, can have an impact on long-run inflation as well as transitions between steady states. We use the analysis to provide a fresh perspective on the forces that drove global inflation downward over the past four decades. We argue that for inflation to remain low and stable in the future, political economy factors, such as strengthened central bank independence or more credible public debt policy, would need to offset the global economic pressures now pushing average long-run inflation upward.