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22. Lessons from the Inflation of 2021-202(?)
- Author:
- Asha Banerjee and Josh Bivens
- Publication Date:
- 12-2022
- Content Type:
- Working Paper
- Institution:
- Political Economy Research Institute (PERI), University of Massachusetts Amherst
- Abstract:
- Starting in mid-2021, inflation in the United States rose to levels not seen since the early 1980s. This inflation followed on the heels of the economic shock imposed by the global COVID-19 pandemic and the significant fiscal policy interventions meant to smooth the fallout of this shock. As of October 2022, inflation – both headline and core measures stripping out food and energy prices – remained at historically high levels, though there are significant signs of softening in the near-future. This episode has sparked furious debate over the proper policy response, and has exposed how little innovative thinking has been done on inflation by either macroeconomists or policy analysts since the 1980s price acceleration was ended by the Volcker shock. This paper identifies a number of key questions raised by the inflationary outbreak of the past 18 months and offers some answers. An extremely brief summary of these questions and answers is provided below, with the rest of the paper expanding on these points.
- Topic:
- Economy, Inflation, Macroeconomics, Fiscal Policy, and COVID-19
- Political Geography:
- North America and United States of America
23. How the Inflation Reduction Act Will Drive Global Climate Action
- Author:
- Frances Colon, Cassidy Childs, and Anne Christianson
- Publication Date:
- 08-2022
- Content Type:
- Working Paper
- Institution:
- Center for American Progress - CAP
- Abstract:
- The Inflation Reduction Act puts the United States on track to meeting its Paris Agreement commitment and to reclaiming the mantle of global climate leadership.
- Topic:
- Climate Change, Energy Policy, Environment, International Cooperation, and Inflation
- Political Geography:
- North America and United States of America
24. Another reason to raise the Fed's inflation target: An employment and output boom
- Author:
- David Reifschneider and David Wilcox
- Publication Date:
- 08-2021
- Content Type:
- Policy Brief
- Institution:
- Peterson Institute for International Economics (PIIE)
- Abstract:
- In 2012, the Federal Reserve formally adopted an inflation target and set it at 2 percent, in line with the level chosen by many other central banks. In hindsight, this setting left policymakers with too little room to cut interest rates when they want to fight recessions. Many researchers have noted that if central banks raised their inflation targets—either individually or in concert—they could do a better job in the long run of keeping inflation near its target and the workforce fully employed. Reifschneider and Wilcox highlight an additional and less-noted consequence of raising the inflation target modestly: The economy could enjoy a temporary but substantial boom in employment and output as it adjusted to the increase in the target. Critical to generating this favorable outcome would be decisive action by monetary policymakers to ensure that the higher inflation target is achieved in a reasonably timely manner. In light of substantial transition benefits, as well as the long-run improvement in economic performance, the authors recommend that the Federal Reserve raise its inflation target to 3 percent as part of its next framework review.
- Topic:
- Federal Reserve, Employment, Economy, and Inflation
- Political Geography:
- North America and United States of America
25. Overheating debate: Why not in Japan?
- Author:
- Egor Gornostay and Madi Sarsenbayev
- Publication Date:
- 06-2021
- Content Type:
- Policy Brief
- Institution:
- Peterson Institute for International Economics (PIIE)
- Abstract:
- An intense debate has erupted over whether the unprecedented size of the US fiscal stimulus will cause the US economy to overheat and generate high inflation. To date, the debate has focused primarily on the United States, even though many other developed economies responded to the COVID-19 crisis with unprecedented economic stimulus packages. By some measures, Japan stands out: The total amount of its three consecutive stimulus packages is estimated to exceed 50 percent of its GDP, about twice as high as the US fiscal packages (about 26 percent of US GDP). However, overheating concerns are not being actively raised for Japan. This Policy Brief finds that although Japan’s headline number looks astonishingly high, the actual size of its discretionary fiscal measures is about 16 percent of GDP, substantially smaller than the total size of the US packages. US fiscal stimulus is the largest among Group of Seven (G7) countries relative to GDP, justifying the attention economists have given it. The United Kingdom is estimated to spend more than Japan as a proportion of GDP, but even the UK stimulus program markedly lags behind that of the United States. If additional stimulus measures making their way through the legislative process in Canada are counted, Japan’s fiscal stimulus looks even smaller and would amount to being only average in size among G7 countries. Given this and the lackluster performance of its economy in the first quarter of 2021, it is unlikely that Japan will find itself in overheating territory any time soon.
- Topic:
- Inflation, G7, and COVID-19
- Political Geography:
- Japan, Asia, North America, and United States of America
26. Low Inflation Bends the Phillips Curve
- Author:
- Joseph E. Gagnon and Christopher G. Collins
- Publication Date:
- 04-2019
- Content Type:
- Working Paper
- Institution:
- Peterson Institute for International Economics (PIIE)
- Abstract:
- The Phillips curve, which traces out a negative relationship between inflation and unemployment, has undergone tremendous changes over more than 100 years. Some researchers argue that the slope of the curve in the United States fell substantially around 20 years ago so that unemployment now has little or no effect on inflation. This paper shows that another hypothesis is equally consistent with the data: The Phillips curve may be nonlinear when inflation is low, with the economy having operated in the flat region of the curve for most of the past 20 years. The next few years may be decisive in the debate between these hypotheses, as unemployment has returned to a range in which a nonlinear curve ought to display significant steepness. A flat Phillips curve implies little change in inflation going forward, but a nonlinear curve implies moderate increases in inflation over the next few years.
- Topic:
- Economics, Inflation, and Unemployment
- Political Geography:
- North America and United States of America
27. Are Long-Term Inflation Expectations Well Anchored in Brazil, Chile and Mexico?
- Author:
- Michiel De Pooter, Patrice Robitaille, Ian Walker, and Michael Zdinak
- Publication Date:
- 03-2014
- Content Type:
- Commentary and Analysis
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- In this paper, we consider whether long-term inflation expectations have become better anchored in Brazil, Chile, and Mexico. We do so using survey-based measures as well as financial market-based measures of long-term inflation expectations, where we construct the market-based measures from daily prices on nominal and inflation-linked bonds. This paper is the first to examine the evidence from Brazil and Mexico, making use of the fact that markets for longterm government debt have become better developed over the past decade. We find that inflation expectations have become much better anchored over the past decade in all three countries, as a testament to the improved credibility of the central banks in these countries when it comes to keeping inflation low. That said, one-year inflation compensation in the far future displays some sensitivity to at least one macroeconomic data release per country. However, the impact of these releases is small and it does not appear that investors systematically alter their expectations for inflation as a result of surprises in monetary policy, consumer prices, or real activity variables. Finally, long-run inflation expectations in Brazil appear to have been less well anchored than in Chile and Mexico.
- Topic:
- Development, Economics, Inflation, and Bonds
- Political Geography:
- Brazil, South America, North America, Mexico, and Chile
28. Uncertainty over Models and Data: The Rise and Fall of American Inflation
- Author:
- Seth Pruitt
- Publication Date:
- 12-2008
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- An economic agent who is uncertain of her economic model learns, and this learning is sensi- tive to the presence of data measurement error. I investigate this idea in an existing framework that describes the Federal Reserve’s role in U.S. inflation. This framework successfully fits the observed inflation to optimal policy, but fails to motivate the optimal policy by the perceived Philips curve trade-off between inflation and unemployment. I modify the framework to account for data uncertainty calibrated to the actual size of data revisions. The modified framework ameliorates the existing problems by adding sluggishness to the Federal Reserve’s learning: the key point is that data uncertainty is amplified by the nonlinearity induced by learning. Conse- quently there is an explanation for the rise and fall in inflation: the concurrent rise and fall in the perceived Philips curve trade-off.
- Topic:
- Economics, Inflation, and Models
- Political Geography:
- United States and North America
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