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Anchored or Not: How Much Information Does 21st Century Data Contain on Inflation Dynamics?

Author

Listed:
  • Michael T. Kiley

    (Federal Reserve Board)

Abstract
Inflation was low and stable in the United States during the first two decades of the 21st century and broke out of its stable range in 2021. Experience in the early 21st century differed from that of the second half of the 20th century, when inflation showed persistent movements including the “Great Inflation” of the 1970s. This analysis examines the extent to which the experience from 2000–19 should lead a Bayesian decisionmaker to update their assessment of inflation dynamics. Given a prior for inflation dynamics consistent with 1960–99 data, a Bayesian decisionmaker would not update their view of inflation persistence in light of 2000–19 data unless they placed very low weight on their prior information. In other words, 21st century data contain very little information to dissuade a Bayesian decisionmaker of the view that inflation fluctuations are persistent, or “unanchored.” The intuition for, and implications of, this finding are discussed.

Suggested Citation

  • Michael T. Kiley, 2024. "Anchored or Not: How Much Information Does 21st Century Data Contain on Inflation Dynamics?," International Journal of Central Banking, International Journal of Central Banking, vol. 20(1), pages 239-261, February.
    • Handle: RePEc:ijc:ijcjou:y:2024:q:1:a:6
    as

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    References listed on IDEAS

    as
    1. Michael T. Kiley, 2007. "Is Moderate-to-High Inflation Inherently Unstable?," International Journal of Central Banking, International Journal of Central Banking, vol. 3(2), pages 173-201, June.
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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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