Unconventional Monetary Policy and Inflation in the U.S.: How Much Inflation was Missing?

The U.S. inflation rate for the period 2008-2016 was abnormally low despite the execution of a high expansive monetary policy, which has been called “the missing inflation paradox”. In this paper we estimate the missing inflation as the difference between the inflation predicted, and the observed rate using two monetarist models. The results support the adequacy of this approach to explain the inflation during 1970-2005. However, after that, the estimated missing inflation was around 3.5%-3.9% annually on average. Interestingly, this phenomenon apparently starts in 2006, previous to the beginning of the Great Recession. Although we do not present a formal explanation, the models used allow us to suspect the existence of an unusually high (and transitory) increase in the demand for real money balances.