The relationship between inflation and the real economy If the anchor for inflation is the inflation aim, the Phillips curve – the link between the real economy and inflation – plays a central role in allowing central banks to steer inflation towards that aim. But in the low inflation environment, prices appear to have become less responsive to the real economy.
And, second, even if we could spell out our objective function, the way our quantitative models depict the financial sector lacks the granularity needed to quantify trade-offs in a sufficiently precise manner. So, at the end, I generally agree with Andy’s conclusion that we will likely keep shooting in the dark, which means shooting many arrows at the same target.