Did the global financial crisis and the pandemic induce persistent deflation avoidance in major central banks?

Major western central banks, such as the Fed and the ECB, reacted very mildly or not at all to the return of inflation since the second half of 2020. The huge balance sheets accumulated by those central banks over the global financial crisis and the pandemic are still at elevated levels and the recent correlation between inflation and the real exante policy rate is negative rather than positive violating Taylor’s principle. The paper argues that at least part of those findings are due to the emergence of recession avoidance (RA) preferences at those central banks in the aftermath of the two crises. In the face of uncertainty such preferences assign higher importance to downward shocks to the output gap than to upward shocks to the inflation gap relatively to preferences that are symmetric in both gaps. The fact that prior to the global financial crisis and the pandemic the Fed and the ECB reacted in line with the prescription of Taylor’s principle yields additional support for this conclusion. The paper discusses the extent to which this asymmetry in central bank preference is likely to persist in light of the longer run changes in monetary institutions and policies triggered by the two crises. Chinese monetary policy over the two crises was expansionary albeit to a lesser extent than those of the Fed and the ECB. RA preferences emerged in Japanese monetary policy long before, and intensified with, the outbreak of the last two crises. By contrast in countries with permanently loose monetary policies such as Argentina the main concern of the CB over the two crises remained inflation as was the case long before they occurred.