We identify temporary inflation events, times where inflation exceeds 2 sd-s above average. Our model helps make sense of these episodes. High inflation comes with high spreads, recessions, and tight monetary policy. About half of the inflation is attributable to default risk.

Monetary policy can deliver the flexible price allocation, but this is not desirable, not constrained efficiency. We design simple interest rate rules that deliver efficiency (in tractable model) and large welfare gains (in quant model) relative to strict inflation targeting.