Inflation expectations, persistence and monetary policy

Monetary policy is often based on the idea that policymakers can achieve reductions in inflation by producing some economic slack. How much slack is needed in turn depends on the degree of inflation persistence; if persistence is low, the output costs to disinflation will be small. Inflation persistence has posed a major challenge for monetary authorities in emerging market economies (EMEs) over the years and is believed to have been a factor behind the failure of a number of stabilisation programmes seeking to end periods of very high inflation. Even in areas where inflation has been relatively moderate, such as the euro area, inflation persistence has been a special concern because of the perceived costs of price and wage rigidity.