Political Geography: Global Focus / Topic: Inflation

Author:: Kristin Forbes, Joseph E. Gagnon, and Christopher G. Collins
Publication Date:: 03-2020
Content Type:: Working Paper
Institution:: Peterson Institute for International Economics
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

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

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

Author:: Joseph Gagnon
Publication Date:: 02-2009
Content Type:: Working Paper
Institution:: Board of Governors of the Federal Reserve System
Abstract:: Sharp exchange rate depreciations, or currency crashes, are associated with poor economic outcomes in industrial countries only when they are caused by inflationary macroeconomic policies. Moreover, the poor outcomes are attributable to inflationary policies in general and not the currency crashes in particular. On the other hand, crashes caused by rising unemployment or external deficits have always had good economic consequences with stable or falling inflation rates.
Topic:: Economics, Exchange Rate Policy, Inflation, and Currency
Political Geography:: Global Focus

Author:: Martin Bodenstein, Christopher J. Erceg, and Luca Guerrieri
Publication Date:: 08-2008
Content Type:: Working Paper
Institution:: Board of Governors of the Federal Reserve System
Abstract:: In a stylized DSGE model with an energy sector, the optimal policy response to an adverse energy supply shock implies a rise in core inflation, a larger rise in headline inflation, and a decline in wage inflation. The optimal policy is well-approximated by policies that stabilize the output gap, but also by a wide array of “dual mandate” policies that are not overly aggressive in stabilizing core inflation. Finally, policies that react to a forecast of headline inflation following a temporary energy shock imply markedly different effects than policies that react to a forecast of core, with the former inducing greater volatility in core inflation and the output gap.
Topic:: Economics, Energy Policy, Inflation, and Supply
Political Geography:: Global Focus

Author:: Davide Debortoli and Ricardo Nunes
Publication Date:: 09-2008
Content Type:: Working Paper
Institution:: Board of Governors of the Federal Reserve System
Abstract:: Central banks, whether independent or not, may occasionally be subject to external pressures to change policy objectives. We analyze the optimal response of central banks to such pressures and the resulting macroeconomic consequences. We consider several alternative scenarios regarding policy ob- jectives, the degree of commitment and the timing of external pressures. The possibility to adopt “more liberal” objectives in the future increases current inflation through an accommodation effect. Simultaneously, the central bank tries to anchor inflation by promising to be even “more conservative” in the future. The immediate effect is an output contraction, the opposite of what the pressures to adopt “more liberal” objectives may be aiming. We also discuss the opposite case, where objectives may become “more conservative” in the future, which may be the relevant case for countries considering the adoption of inflation targeting.
Topic:: Finance, Banks, Inflation, and Central Bank
Political Geography:: Global Focus

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