Increased Cost of Disinflation Due to a Delayed Policy Response to a Supply Shock
When a central bank delays its response to a negative supply shock, such as an oil price increase, it risks allowing inflation expectations to rise. This de-anchoring of expectations shifts the Phillips curve upward, leading to higher inflation. Consequently, the subsequent adjustment to bring inflation back to its target becomes significantly more costly, requiring a more severe or prolonged period of policy tightening than would have been necessary with a prompt response.
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Introduction to Macroeconomics Course
Ch.4 Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
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Ch.5 Macroeconomic policy: Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
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