It is in this context where the topic of this year’s conference falls right into the core business of central banks: understanding inflation dynamics, and how they influence monetary policymaking. 1  Central Bank of Chile October 2018  Indeed, throughout the post crisis period we have observed a puzzling behavior of inflation in many developed countries, as standard Phillips curve approaches have done a rather poor job predicting price pressures. During this period, the unemployment rate has reached historically low levels, but inflation has remained low. Economists have referred to a “twin puzzle” in inflation dynamics and several explanations with different policy implications have been put forward. Some have pointed to the existence of “hysteresis” as causing a drop in potential output and, consequently, smaller gaps in the economy after the crisis. Others argue that the weakening of the relationship between activity and inflation responds to structural changes, like globalization forces pulling wages down, or technological innovation prompting changes in industrial organization. Another alternative, a sort of “catch 22” for central bankers, is that the flattening of the Phillips curve may be the consequence of the success of central banks in targeting inflation. Measurement issues should not be ruled out either. Measuring a common movement of prices throughout the economy has never been a straightforward task, but this may be getting harder as standardized goods take a smaller and smaller share of household consumption compared to services and to goods that are subject to fast change.
Central Bank of Chile October 2018  Central Bank of Chile’s Twenty-Second Annual Conference: “Changing Inflation Dynamics, Evolving Monetary Policy” Opening remarks by Mario Marcel, Governor of the Central Bank of Chile October 25, 2018 – Santiago, Chile Welcome remarks Good morning everybody and welcome to the Twenty-Second Annual Conference of the Central Bank of Chile. It is a pleasure to host this event that every year gives us the opportunity to reflect and discuss about issues that have direct implications on our work as central bankers and stimulate the related academic agenda. I am looking forward to active discussions today and tomorrow on this year’s conference theme: changing inflation dynamics and its implications for monetary policy. This conference is being followed online via live streaming on our website. Inflation dynamics and monetary policy in recent years The last ten years have been an extraordinary time for macroeconomics. The deepest financial crisis since the Great Depression was followed by an unprecedented bold, coordinated, unorthodox and persistent response by central banks in advanced countries. In all, a decade in which the world economy stood a long way from normal and, as it depended so much on emergency support, it was not easy to detect how much the economy was changing underneath. So it is perhaps not that surprising that once the same central banks began to envisage a gradual, cautious and well communicated approach to monetary policy normalization, some challenges appeared on the road.