It is this latter point – the speed with which inflation expectations respond – that I would like to focus on next. In theoretical models assuming a forward-looking Phillips curve, inflation expectations respond instantaneously if the commitment regarding future monetary easing is credible. However, inflation expectations observed in practice are highly sticky and change only slowly.
Policy and academic writing generally limits the term “macroprudential” to measures directed specifically at countering risks in the financial system that, if realized, can severely impact real activity.1 But adoption of consistent terminology does not itself resolve questions of whether, for example, increases in systemic risk are endogenous to the financial system and thus follow a somewhat regular cyclical pattern, or are instead somewhat randomized, albeit repeated, phenomena.2 Differences in views of the origins of systemic risk obviously affect views of the best ways to measure it and, of course, the best policies to contain it.