Events at CERGE-EI

You can join the seminar in person at the following address:
CERGE-EI, Politických vězňů 7, Praha 1, room 402
or online at: https://cerge-ei.webex.com/cerge-ei/j.php?MTID=m7539ca4c7af176cde3a86d6f98584a47
Meeting number: 2744 930 0349
Meeting password: 657982

Presenter: Dali Laxton (This email address is being protected from spambots. You need JavaScript enabled to view it.)

Title: "Oil Prices Meet Monetary Policy Credibility: Faced with Stagflationary Forces, should Central Banks Forget About Soft Landings and Focus More on Anchoring Inflation?"

Abstract:
The past several decades have been characterized by relative resource abundance, which has supported inflation-targeting frameworks and enabled central banks to achieve their objectives. However, certain resources that were once plentiful are now becoming increasingly scarce or depleted. This shift toward scarcity carries significant stagflationary implications for macroeconomic policy strategies moving forward. Central banks must recognize that much of their past success was partly driven by good luck, which is now reversing. We use the endogenous policy credibility model (ENDOCRED) to study the macroeconomic management of such a future, where anchored inflation is not guaranteed—particularly if policy responses to inflationary shocks are delayed. Specifically, we examine the plausibility of oil as a future source of stagflation and construct scenarios where oil prices are determined endogenously. These scenarios then inform policy under different credibility regimes and response times to illustrate potential costs. We conclude that it would be prudent for central banks (e.g., the Fed) to reorient their strategy from prioritizing a soft landing and avoiding a growth recession to one that tolerates some excess capacity in the economy. This approach ensures that monetary policy credibility is fully restored—not only in inflation expectations within bond markets but also among wage and price setters. Such a strategy would better position central banks to manage the next inflation shock.