Concern about “lost inflation” has been heightened recently by the apparent inability of central banks in the largest democracies, a decade beyond the GFC, to restore their “safe” CPI inflation ranges. This paper examines the deflationary forces against which monetary policy is now aligned, namely migration, the race to the bottom in capital taxation, and biased technical change, and assesses the consequences looking forward. While inflation rates have edged lower over the past two decades the most important change has been declines in long maturity yields, initially driven by strong growth in high-saving Asia and by redistribution in the advanced economies to high-saving households, and bolstered subsequently by return pessimism due to low growth in measured productivity. Ironically, today’s low rates also stem from conventional monetary policy failure, expanded central bank balance sheets and the resulting global “bond bubble”. Future monetary policy effectiveness as deflationary forces continue will depend in the advanced economies on government interventions to address underlying inequality and financial market “normalisation”.
|Name||Economics Discussion Papers|