New Theory Shows How Low Inflation Uncertainty Can Impact Prices
The article presents a new theory called the Behavioral Attention Phillips Curve (BAPC) that explains why inflation and economic trends behave the way they do. The researchers found that when inflation is less uncertain, companies pay less attention to monetary shocks and change prices less, leading to a flatter Phillips Curve. This means that inflation becomes more stable when there is less uncertainty. By using new measures of inflation uncertainty, the BAPC model outperformed traditional models in predicting economic trends, especially after the 2008-2009 Financial Crisis. The researchers also discovered that different economic equilibria can exist depending on the level of volatility, creating challenges for Central Banks trying to raise inflation during quiet periods.