From Chronic Inflation to Chronic Deflation: Focusing on Expectations and Liquidity Disarray Since WWII
The paper discusses policy relevant models, going from (1) chronic inflation in the 20th century after WWII, to (2) credit sudden stop episodes that got exacerbated in Developed Market economies after the 2008 Lehman crisis, and appear to be associated with chronic deflation. The discussion highlights the importance of expectations and liquidity, and warns about the risks of relegating liquidity to a secondary role, as has been the practice in mainstream macro models prior to the Great Recession.
This is an abridged version of a paper, under the same title, prepared for the World Bank conference entitled The State of Economics, The State of the World, held in Washington, DC, June 8 and 9, 2016. I am thankful to Edmar Bacha, Sara Calvo, Fabrizio Coricelli, Roque Fernandez, Arvid Lukauscas, and Pablo Ottonello for valuable comments. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Guillermo A. Calvo
The World Bank offered $10,000 for the preparation of this paper, which is scheduled for publication by MIT Press.