I think that last week's episode is a good example of...

  1. 5,193 Posts.
    lightbulb Created with Sketch. 35
    I think that last week's episode is a good example of inflationary expectations management by a central bank using the forward guidance communications channel all in line with the theory of rational expectations.

    https://www.investopedia.com/terms/r/rationaltheoryofexpectations.asp

    "The burning question for me is this: if it does pan out like this (and it looks to me like it will), how much inflation will we get? "

    Central banks do seem to target interest rates that are compatible with full employment and price stability. Traditionally price stability has implied inflation of around 2%. But there is a thing called the Phillips curve, which states that in the short run
    inflation and unemployment have a stable and inverse relationship. This relationship seems to have lead the Fed to change its inflation target to an average, meaning that it will allow inflation to rise somewhat above its 2% target to make up for periods when it was below 2%. In other words, for a short period if unemployment figures come weak inflation may be allowed to go to 3% or even above.

    https://www.investopedia.com/terms/p/phillipscurve.asp
 
arrow-down-2 Created with Sketch. arrow-down-2 Created with Sketch.