Exiting low inflation traps by "consensus": nominal wages and price stability

Speech by Luiz A Pereira da Silva and Benoît Mojon, based on the keynote speech at the Eighth High-level Policy Dialogue between the Eurosystem and Latin American Central Banks, Cartagena de Indias, Colombia, 28-29 November 2019.
BIS speech  | 
20 December 2019
by Luiz Awazu Pereira da Silva and Benoit Mojon
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(1,013kb)
  |  22 pages

After several years of low inflation in spite of extremely low interest rates, it is time to explore alternative ways to lift inflation closer to the 2% target. We argue that social partners and governments should seek a "consensus package" that combines pro-growth fiscal policy and nominal wage increases. Such "consensus packages" have played a central role when we needed to break away from high-inflation equilibria. Striking successes of such approaches include Israel, France, and Italy in the early 1980s or more recently Spain in 2012 and Finland in 2016. The consensus approach would be decisive to exit the current low-inflation trap. Its implementation, from wage inflation to price inflation is, albeit complex, less uncertain than alternatives. It is preferable to more wait-and-see with low interest rates forever - which might threaten financial stability - or alternatives that have emerged recently in the public debate such as "helicopter money" or modern monetary theory (MMT).