Search

Begin New Search Topic Inflation Political Geography Global Focus

31. Does Low Inflation Pose a Risk to Economic Growth and Central Banks Reputation?

Author:
Marek Dabrowski
Publication Date:
03-2020
Content Type:
Special Report
Institution:
Center for Social and Economic Research - CASE
Abstract:
Inflation in advanced economies is low by historical standards but there is no threat of deflation. Slower economic growth is caused by supply-side constraints rather than low inflation. Below-the-target inflation does not damage the reputation of central banks. Thus, central banks should not try to bring inflation back to the targeted level of 2%. Rather, they should revise the inflation target downwards and publicly explain the rationale for such a move. Risks to the independence of central banks come from their additional mandates (beyond price stability) and populist politics.
Topic:
Economic Growth, Inflation, and Central Bank
Political Geography:
Global Focus

32. Low inflation bends the Phillips curve around the world

Author:
Kristin Forbes, Joseph E. Gagnon, and Christopher G. Collins
Publication Date:
03-2020
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
This paper models inflation by combining the multicountry framework of one of its authors (Forbes) with the nonlinear specification proposed by the other two (Gagnon and Collins). The results find strong support for a Phillips curve that becomes nonlinear when inflation is low, in which case excess economic slack has little effect on inflation. This finding is consistent with evidence of downward nominal wage and price rigidity. The estimates also show a significant and economically meaningful Phillips curve relationship between slack and inflation when slack is negative (i.e., when output is above long-run potential). In this nonlinear model, international factors play a large role in explaining headline inflation, a role that has increased over time, supporting the results of Forbes’ linear model.
Topic:
Economics, Inflation, and Data
Political Geography:
Global Focus

33. Economic recovery and inflation

Author:
Marek Dabrowski
Publication Date:
04-2018
Content Type:
Special Report
Institution:
Center for Social and Economic Research - CASE
Abstract:
In the last decade, advanced economies, including the euro area, experienced deflationary pressures caused by the global financial crisis of 2007-2009 and the anti-crisis policies that followed—in particular, the new financial regulations (which led to a deep decline in the money multiplier). However, there are numerous signs in both the real and financial spheres that these pressures are disappearing. The largest advanced economies are growing up to their potential, unemployment is systematically decreasing, the financial sector is more eager to lend, and its clients—to borrow. Rapidly growing asset prices signal the possibility of similar developments in other segments of the economy. In this new macroeconomic environment, central banks should cease unconventional monetary policies and prepare themselves to head off potential inflationary pressures.
Topic:
Economics, Monetary Policy, Economic Growth, Inflation, Macroeconomics, and Unemployment
Political Geography:
Europe, Global Focus, and European Union

34. Persistent Effects of Autonomous Demand Expansions

Author:
Daniele Girardi, Walter Paternesi Meloni, and Antonella Stirati
Publication Date:
02-2018
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The prevailing wisdom that aggregate demand shocks determine short-run cyclical fluctuations around a supply-determined equilibrium growth rate and an associated equilibrium unemployment rate (or NAIRU) has been called into question by various strands of literature over the last few decades. Specifically, a recently revived literature on hysteresis finds significant persistence in the effects of negative aggregate demand shocks (e.g. Blanchard et al. 2015; Fatás and Summers 2016; Martin et al. 2015). This paper aims to assess this tendency to return to a supply-determined potential output, independent of aggregate demand, after episodes of demand expansion. In line with the hysteresis literature, we assess the persistence of aggregate demand effects on key macroeconomic outcomes. However, in contrast with much of that literature, we assess whether persistence is detected also in instances of demand expansion. We study 94 episodes of demand expansion in 34 OECD countries between 1960 and 2015. We look at the sum of primary public expenditure and exports, a variable we call 'autonomous demand'. We define an expansion as a large yearly percentage increase in autonomous demand, ‘large’ meaning greater than a standard deviation above the country mean. We analyze the impact of these expansions on key macroeconomic outcomes in the subsequent decade, using various techniques to deal with endogeneity. We employ two main approaches: a dynamic two-way fixed-effects model, analogous to a standard difference-in-differences estimation; and a propensity score-based specification which explicitly models selection bias. We find a highly significant persistent effect on the GDP level: a one-off expansion in our autonomous demand variable by (an average of) 5% is associated 10 years later with a GDP level around 3% higher than in the control group, with no sign of mean reversion. We also document strong persistent effects on capital stock, employment and participation rates. Effects on productivity and the unemployment rate are also strong and quite persistent, but evidence regarding their permanence is more mixed. We do not find that expansions, on average, cause high or accelerating inflation. Our results lead us to ask whether hysteresis should be considered a distortion in the working of market economies that holds only in specific circumstances – as the mainstream literature has generally suggested – or whether it is, in fact, a pervasive phenomenon which holds most of the time.
Topic:
Economics, Inflation, Unemployment, and Capital Formation
Political Geography:
Global Focus

35. Estimating the Effect of Inflation on Stock Returns Using Regime-Dependent Impulse Response Analysis

Author:
Atilla Çi̇fter
Publication Date:
02-2018
Content Type:
Journal Article
Journal:
AURUM Journal of Social Sciences
Institution:
Altinbas University
Abstract:
This study investigates the effect of inflation on stock market in South Africa with regime-dependent impulse response analysis. Nonlinear regime-dependent interaction is tested with the Markov switching vector autoregression approach between July, 1995 and July, 2017. The results show that there is a negative impact of inflation in the short-term, and that a long-term relationship does not exist. This indicates that common stocks cannot be a hedge against inflation. The other findings relate to regime dependency and nonlinear correlation. I also found that movements of stock market are strongly regime-dependent. These results are robust in controlling additional macroeconomic variables.
Topic:
Inflation, Macroeconomics, Stock Markets, and Fisher Hypothesis
Political Geography:
Global Focus

36. Are Low Interest Rates Deflationary? A Paradox of Perfect- Foresight Analysis

Author:
Mariana Garcia-Schmidt
Publication Date:
09-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
A prolonged period of extremely low nominal interest rates has not resulted in high inflation. This has led to increased interest in the “Neo-Fisherian” proposition according to which low nominal interest rates may themselves cause inflation to be lower. The fact that standard models of the effects of monetary policy have the property that perfect foresight equilibria in which the nominal interest rate remains low forever necessarily involve low inflation (at least eventually) might seem to support such a view. Here, however, we argue that such a conclusion depends on a misunderstanding of the circumstances under which it makes sense to predict the effects of a monetary policy commitment by calculating the perfect foresight equilibrium consistent with the policy. We propose an explicit cognitive process by which agents may form their expectations of future endogenous variables. Under some circumstances, such as a commitment to follow a Taylor rule, a perfect foresight equilibrium (PFE) can arise as a limiting case of our more general concept of reflective equilibrium, when the process of reflection is pursued sufficiently far. But we show that an announced intention to fix the nominal interest rate for a long enough period of time creates a situation in which reflective equilibrium need not resemble any PFE. In our view, this makes PFE predictions not plausible outcomes in the case of policies of the latter sort. According to the alternative approach that we recommend, a commitment to maintain a low nominal interest rate for longer should always be expansionary and inflationary, rather than causing deflation; but the effects of such “forward guidance” are likely, in the case of a long- horizon commitment, to be much less expansionary or inflationary than the usual PFE analysis would imply.
Topic:
Economics, Monetary Policy, Inflation, and Interest Rates
Political Geography:
Global Focus

37. Monetary Policy, Trend Inflation and the Great Moderation: An Alternative Interpretation - Comment

Author:
Jonas E. Arias, Guido Ascari, Nicola Branzoli, and Efrem Castelnuovo
Publication Date:
01-2015
Content Type:
Commentary and Analysis
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Working with a small-scale calibrated New-Keynesian model, Coibion and Gorodnichenko (2011) find that the reduction in trend inflation during Volcker's mandate was a key factor behind the Great Moderation. We revisit this finding with an estimated New-Keynesian model with trend inflation and no indexation based on Christiano, Eichenbaum and Evans (2005). First, our simulations confirm Coibion and Gorodnichenko's (2011) main finding. Second, we show that a trend inflation-immune Taylor rule based on economic theory can avoid indeterminacy even at high levels of trend inflation such as those observed in the 1970s.
Topic:
Economics, Monetary Policy, Economic Theory, and Inflation
Political Geography:
Global Focus

38. Individual Price Adjustment Along the Extensive Margin

Author:
Etienne Gagnon, David López-Salido, and Nicholas Vincent
Publication Date:
08-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Firms employ a rich variety of pricing strategies whose implications for aggregate price dynamics often diverge. This situation poses a challenge for macroeconomists interested in bridging micro and macro price stickiness. In responding to this challenge, we note that differences in macro price stickiness across pricing mechanisms can often be traced back to price changes that are either triggered or cancelled by shocks. We exploit observed micro price behavior to quantify the importance of this margin of adjustment for the response of inflation to shocks. Across a range of empirical exercises, we find strong evidence that changes in the timing of price adjustments contribute significantly to the flexibility of the aggregate price level.
Topic:
Economics, Monetary Policy, Inflation, and Price
Political Geography:
Global Focus

39. Individual Price Adjustment Along the Extensive Margin

Author:
Etienne Gagnon, David López-Salido, and Nicholas Vincent
Publication Date:
08-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Firms employ a rich variety of pricing strategies whose implications for aggregate price dynamics often diverge. This situation poses a challenge for macroeconomists interested in bridging micro and macro price stickiness. In responding to this challenge, we note that differences in macro price stickiness across pricing mechanisms can often be traced back to price changes that are either triggered or cancelled by shocks. We exploit observed micro price behavior to quantify the importance of this margin of adjustment for the response of inflation to shocks. Across a range of empirical exercises, we find strong evidence that changes in the timing of price adjustments contribute significantly to the flexibility of the aggregate price level.
Topic:
Economics, Business, Inflation, Macroeconomics, and Price
Political Geography:
Global Focus

40. A State-Dependent Model for Inflation Forecasting

Author:
Andrea Stella and James H. Stock
Publication Date:
11-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We develop a parsimonious bivariate model of inflation and unemployment that allows for persistent variation in trend inflation and in the non-accelerating inflation rate of unemployment. The model, which consists of five unobserved components including the trends) with stochastic volatility, implies a time-varying vector autoregression model for changes in the rates of inflation and unemployment. The implied backwards-looking Phillips curve has a time-varying slope that is steeper in the 1970s than in the 1990s. Pseudo out-of-sample forecasting experiments indicate improvements upon univariate benchmarks. Since 2008, the implied Phillips curve has become steeper and the the non-accelerating inflation rate of unemployment has increased.
Topic:
Development, Labor Issues, Inflation, State Building, and Unemployment
Political Geography:
Global Focus