Prior to 2021, most of the world’s advanced economies experience a long period of stable, low inflation, said the authors of research from the Brooking Papers on Economic Activity, including the U.S., which long ran below the Federal Reserve’s 2% inflation target. The paper’s senior author, Pierre Yared of Columbia Business School, discussed its analysis with Brookings Senior Fellow Don Kohn on an episode of the Brookings Podcast of Economic Activity.
The downward trend in inflation from the 1980s through the 2010s is often attributed in part to central banks adopted 2% inflation targets, price stability mandates and independence from finance governments and ministries, Kohn said. However, Yared points to three global factors that made it easier for central banks to bring down and stabilize inflation: First, globalization allowed increased competition to push prices down, which diminished the monopoly power of domestic companies.
Next, the expansion of the Washington consensus and the resulting fiscal consolidation of emerging markets relieved pressure on central banks to support fiscal expansions. Finally, de-unionization in advanced economies put downward pressure on waged and stimulated labor market competition.
Yared also brought up an additional factor—a reduction in long-term real interest rates to bring down nominal interest rates close to zero. This helped support central bank independence, which played a role in decreasing inflation.
