Policy ‘pivot’ can deliver soft landing, says NBER paper

Authors aim for more realistic model of expectations through “level-k thinking”

Growth chart

New research finds central banks may be able to engineer a soft landing after a supply shock if they execute a policy “pivot”, though the approach has some drawbacks.

Authors Paul Beaudry, Thomas Carter and Amartya Lahiri model how “looking through” a supply shock may be appealing to policy-makers, but could also allow inflation expectations to de-anchor. They reject the “canonical” new Keynesian model in favour of an approach where wages are more rigid than prices.

Their model employs an

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