Why Is Inflation So Low? Four Heterodox Explanations

August 3, 2017

Like the Pope during the Galileo affair, central bankers prefer to deny the facts that contradict their dogma, the Phillips curve and the Fisher equation in this case. The first posits the existence of a trade-off between inflation and the unemployment rate. The second defines the exogenous and stationary velocity of money as the ratio of nominal GDP to the monetary base. If these axioms hold, central bankers should be able to target both the inflation and unemployment rates by managing the money supply. But the past ten years have badly violated these two axioms: the supposedly negative relation between unemployment and inflation has been positive in most of the developed world, while the velocity