From Chronic Inflation to Chronic Deflation: Focusing on Expectation and Liquidity Disarray since World War II

Abstract

The paper discusses policy relevant models, going from (1) chronic inflation in the 20th century after WW11, to (2) credit sudden stop that got exacerbated in Developed Market economies after the 2008 Lehman crisis, and appears to be associated with chronic deflation. The discussion highlights the importance of expectations and liquidity, and warns about the risks of relegating liquidity to a secondary role, as has been the practice in mainstream macro models prior to the Great Recession.