IMF, Report: Rethinking Monetary Policy in a Changing World

“The intellectual framework adopted by central banks after the 2008 crisis does not yet appear to have de-anchored inflation expectations. But it would be costly to wait until de-anchoring begins to alter the framework. Warning signals have already emerged in recent inflation expectations data. The loss of the inflation anchor, with its attendant consumer and business uncertainty, would hinder both aggregate demand and supply. That would have important consequences both for central banks—because it would hamper their ability to control inflation—and for eco­nomic activity, because consumers and firms would hesitate to buy and invest. “

“To address these problems, central banks should return to a monetary approach in which stabilizing inflation expectations is a central priority. Policy cannot tighten only after infla­tion occurs. Instead, central banks should take action as soon as warning signals flash. Central banks must incorporate both households’ and financial markets’ expectations of future infla­tion, since those expectations shape both aggre­gate demand conditions and asset prices.”