This paper first outlines the key stylized facts about changes in inflation dynamics in recent years: 1) inflation persistence has declined, 2) the Phillips curve has flattened, and 3) inflation has become less responsive to other shocks. These changes in inflation dynamics are interpreted as resulting from an anchoring of inflation expectations as a result of better monetary policy. The paper then goes on to draw implications for monetary policy from this interpretation, as well as implications for inflation forecasts.
Based on a speech given at the Federal Reserve Bank of San Francisco's Annual Macro Conference, San Francisco, California, March 23, 2007. The views expressed here are my own and are not necessarily those of the Board of Governors of the Federal Reserve, the Federal Reserve System, or the National Bureau of Economic Research. I want to thank Michael Kiley, Jean-Philippe Laforte, Deborah Lindner, David Reifschneider, John Roberts, and Jeremy Rudd for their extremely helpful comments and assistance on this speech.