Non-deflation non-surprise
Why didn’t the sustained high unemployment after 2008 push us into deflation? There are some popular stories — downward nominal wage rigidity that makes the long-run Phillips curve non-vertical at low inflation rates, “anchored” inflation expectations — and I cite those stories myself. But standard discourse on macroeconomics has not fully taken the non-deflation surprise into account.
That was Paul Krugman in his post from today.
Non-deflation isn't as much of a surprise in the information equilibrium model. Over time the response to inflation from output shocks has become approximately zero. And it's related to the liquidity trap -- the lack of a response to the price level from monetary expansion.
