IMF economists Anil Ari, Carlos Mulas-Granados, Lev Ratnovski, and Wei Zhao and Victor Mylonas of Tilburg University, explored 111 inflation shocks between 1973 and 2014. Use the links to read this important study. Here is a summary of what they found.
Sources: Anil Ari, Lev Ratnovski, History’s Inflation Lessons, International Monetary Fund, December 2023, and Ari, A., Mulas-Granados, C., Mylonas, V., Ratnovski, L., & Zhao, W. (2023)
One Hundred Inflation Shocks: Seven Stylized Facts. IMF Working Paper WP/23/190
What is lesson #1?
Inflation is persistent. It takes years to return to the pre-shock rate. In 60 percent of the cases studied, it took an average of three years for inflation to return to pre-shock rates, and in 40 percent of cases, inflation had not returned to pre-shock rates after five years.
What is lesson #2?
Don’t celebrate victory over inflation and loosen monetary policy too soon. Denmark, France, Greece, and the United States were among nearly 30 countries in the study that loosened monetary policy too soon after the 1973 oil-price shock.
What is lesson #3?
Maintain tight monetary policy consistently over a period of several years. Italy and Japan demonstrated the benefit of tighter-for-longer policies after the 1979 oil-price shock.
What is lesson #4?
Policy credibility matters. Central banks that maintained low and stable inflation before an inflation shock kept inflation expectations more firmly anchored and returned inflation to target more quickly. Many central banks today have established policy credibility and might return inflation to target sooner than in the past.
What is lesson #5?
Pay close attention to the labor market. Countries that end inflation successfully have lower nominal wage growth, but don’t have lower real wage growth.
What is lesson #6?
Maintain external stability and a strong currency with tight monetary policy.
What is lesson #7?
Price stability has long-term benefits. The trade-off between lowering inflation and achieving higher growth and lower unemployment is temporary. Five years after an inflation shock, countries that ended inflation had higher growth and lower unemployment than those in which inflation persisted.
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