"The broader lesson is that credibility defines the scope for discretion. ... By the 2020s .. the Fed had enough credibility to experiment with a more flexible approach. But credibility is not a permanent asset: repeated deviations could quickly undermine it." This seems to me to be an important conclusion. Applying it to current circumstances, it suggests that the Fed would be taking a risk with its own credibility if it were to be too permissive about a tariff-induced inflation increase, perhaps even a temporary one. The key, both during the post-Covid episode and now, is the anchoring of inflation expectations.
Thank you Stefan for commenting on the paper - now I really want to read it!
"The broader lesson is that credibility defines the scope for discretion. ... By the 2020s .. the Fed had enough credibility to experiment with a more flexible approach. But credibility is not a permanent asset: repeated deviations could quickly undermine it." This seems to me to be an important conclusion. Applying it to current circumstances, it suggests that the Fed would be taking a risk with its own credibility if it were to be too permissive about a tariff-induced inflation increase, perhaps even a temporary one. The key, both during the post-Covid episode and now, is the anchoring of inflation expectations.
Thank you Stefan for commenting on the paper - now I really want to read it!