Title: Es caping Nash and volatile inflation
First published: 2007
Description: "Why is inflation so much lower and at the same time more stable in developed economies in the  1990s, compared with the 1970s? This paper suggests that the United Kingdom, United States and  other countries may have escaped from a volatile inflation equilibrium. Our argument builds on  the story proposed by Tom Sargent in The conquest of American inflation, where the fall in  inflation in the 1980s was attributed to the changing beliefs informing monetary policy. To explain  the escape in inflation volatility, we unwind one of Sargent's simplifications and allow the  monetary authority to react to some of the shocks in the economy. In this new model, a revised  account of recent history is that when the evidence turned against the existence of a long-run  inflation-output trade-off in the 1980s there was an escape from high inflation, but the authorities  were also persuaded to stop using changes in inflation to offset shocks. Inflation and inflation  volatility therefore escaped in tandem. Our analysis also sheds some light on why the escape in  inflation occurred at the time it did. Our model, like the Sargent model it derives from, omits the  revolution in institutional design and understanding that underpins monetary policy. So the  gloomy predictions for the future derived from a literal reading of it are likely to be unfounded."--Bank of England web site.
LC classification: HG186.G7