History, Path Dependency and Inflation/Deflation Fears

I have argued in various talks over the past year that one reason we got into so much trouble over the last decade is that memories of the Great Depression faded. Similarly, I’m fond of pointing out that the U.S. preoccupation with deflation stems from its most traumatic financial experience in the last hundred years, while the European worry about inflation stems from its most traumatic financial experience in the same period.

It is classic path dependency, with how we got here dictating our response to crises. How long, however, until worries about prior price episodes fade and become less binding? When do we need to worry about our collective capacity to remember the past?

A new paper tries to work out an answer, looking at birth year and inflation worries worldwide. The result is a kind of birth-cohort path dependency, with date of birth and experienced inflation trauma conspiring to hardwire some generations’ brains to fret about the future, while others putter on oblivious.

by Michael Ehrmann and Panagiota Tzamourani


Inflation has been well contained over the last decades in most industrialized countries. This implies, however, that memories of high inflation are likely to fade, because over time larger parts of the population have never experienced high inflation, whereas those who have might forget. This paper tests whether memories of high inflation affect agents’ preferences about the importance attached to price stability, using a large database covering over 52,000 survey responses from 23 countries over the years 1981-2000. It finds that memories of hyperinflation are there to last, whereas those of less drastic inflation experiences tend to erode after around 10 to 15 years. The recent decline in the importance attached to price stability does therefore most likely reflect mitigated inflation concerns in an environment of low and stable inflation, but also the consequences of fading memories of high inflation. The longer central banks have successfully delivered price stability, the more important it is for them to engage in a proactive communication, especially with the younger generations, about the merits of low and stable inflation.



Michael Ehrmann and Panagiota Tzamourani, “Memories of High Inflation,” SSRN eLibrary (September 23, 2009), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1476196.