During the Great Recession (the recession that followed the financial crisis), inflation in advanced countries did not fall as much as a traditional Phillips curve and past experiences would have predicted, given the severity and length of the recession (Williams (2010) and Ball and Mazumder (2011)).
In financial markets, we have observed a rapid shift from liquidity to credit risks, from a prevalent recourse to the market and central banks to massive governments’ intervention. Responses have included varying combinations of deposit guarantees, debt guarantees, capital injections, and asset purchases.