Maintaining the Anchor: An Evaluation of Inflation Targeting in the Face of COVID-19

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RWP 24-15, December 2024; updated June 2026

This paper provides evidence that inflation targeting delivered anchored inflation expectations during the post-2020 inflation surge. Using a macroeconomic model, we illustrate how long-term nominal interest rates respond to an unexpected burst of inflation under both anchored and unanchored inflation expectations. We then evaluate these predictions using high-frequency financial market data from nine advanced economies and illustrate three main findings. First, inflation expectations embedded in asset prices were just as well, or in some countries better anchored, after the pandemic. Second, this favorable outcome was broadly accompanied by perceptions of an aggressive monetary policy response to above-target inflation. And, third, the stability of longer-term inflation expectations greatly improved labor market outcomes during disinflation, contributing to much smaller sacrifice ratios relative to the 1970’s and 80’s.

JEL classifications: E32, E52

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