Abstract:
The remarkable stability of low domestic inflation in many countries
requires explanation. In this paper, a number of competing
hypotheses are evaluated on a stand-alone basis, and all are found
to be inadequate. This includes the view that this outcome has been
solely the result of more effective disinflationary monetary policies.
However, a combination of these hypotheses (including a significant
role for increased global competition) seems to provide a plausible
explanation, not only for continuing low inflation, but also its
coexistence with rapid growth and low real interest rates.
Unfortunately, the analysis also leads to the conclusion that rising
inflation, unwinding financial imbalances, or both, could easily follow
the welcome stability seen to date.
JEL Classification Numbers: E31, E52, E58, F02, F41