Where danger lurks
Olivier Blanchard 03 October 2014
Before the 2008 crisis, the mainstream worldview among US macroeconomists was that economic fluctuations were regular and essentially self-correcting. In this column, IMF chief economist Olivier Blanchard explains how this benign view of fluctuations took hold in the profession, and what lessons have been learned since the crisis. He argues that macroeconomic policy should aim to keep the economy away from ‘dark corners’, where it can malfunction badly.
Until the 2008 global financial crisis, mainstream US macroeconomics had taken an increasingly benign view of economic fluctuations in output and employment. The crisis has made it clear that this view was wrong and that there is a need for a deep reassessment.
The benign view reflected both factors internal to economics and an external economic environment that for years seemed indeed increasingly benign.
Macroeconomic policy Monetary policy
macroeconomics, global crisis, great moderation, rational expectations, nonlinearities, fluctuations, business cycle, monetary policy, inflation, bank runs, deposit insurance, sudden stops, capital flows, liquidity, maturity mismatch, zero lower bound, liquidity trap, capital requirements, credit constraints, precautionary savings, housing boom, Credit crunch, unconventional monetary policy, fiscal policy, sovereign default, diabolical loop, deflation, debt deflation, financial regulation, regulatory arbitrage, DSGE models
Clarifying the debate about deflation concerns
Mickey Levy 21 February 2014
A popular view among economic commentators is that rich countries face a serious risk of deflation, and should adopt aggressive macroeconomic stimulus policies to ward it off. This column argues that despite similar headline inflation rates, the US, Europe, and Japan in fact face very different macroeconomic conditions. In the US, much of the recent disinflation is attributable to positive supply-side developments. In Europe, an aggressive round of quantitative easing might encourage policymakers to delay the reforms that are necessary to avoid a prolonged Japanese-style malaise.
A common theme among many economic policymakers, financial market participants, and the media is that rich industrialised nations face a high risk of deflation, and that deflation always harms economic performance and so must be combatted with aggressive macroeconomic stimulus. Such broad assessments are misleading, and under certain circumstances may lead to misguided policies. More clarity on the topic is required.
Global crisis Monetary policy
eurozone, US, Europe, Japan, deflation, disinflation, quantitative easing
Deflation, debt, and economic stimulus
Richard Wood 03 March 2011
The US, Japan, and Ireland are threatened by the spectres of deficient private demand, rising debt, and a tendency to deflation. This column questions current monetary policy directions, i.e. quantitative easing, and argues that printing money to directly finance fiscal stimulus may be a better option.
The US, Japan, and Ireland are suffering from deficient private demand, rising debt, and a tendency to deflation. This column asks what can be done about it.
We begin by assuming that relevant authorities have decided that new money creation is necessary to work against deflationary tendencies and to stimulate the economy. The central issue explored here then is how should such new money creation best be deployed to create the required economic stimulus?
Macroeconomic policy Monetary policy
deflation, fiscal stimulus, quantitative easing, Economic stimulus
Hire Irving Fisher!
Enrique G. Mendoza 12 February 2009
This column rehabilitates Irving Fisher’s debt-deflation theory to explain the current crisis. It suggests that fiscal stimulus will do little to prevent the crisis from becoming a protracted slump because the problem lies in finance. A cure will require reversing deflation and restarting the credit system.
Global crisis Macroeconomic policy
deflation, financial crisis, Great Depression, debt
Deflation or disinflation?
Robert Ophèle 11 February 2009
The recent rapid fall in inflation, amidst a financial crisis and a very sharp economic slowdown, has raised the spectre of deflation. But, this column argues, current dynamics in France and the euro area are actually characteristic of a much more positive disinflationary trend, resulting from a temporary correction of certain prices, such as energy prices.
Inflation refers to a sustained increase in the general price level in an economy. It is not an instantaneous shock limited to the prices of certain goods. It is a persistent and general process. Inflation is fuelled by expectations – when workers and companies expect prices to rise, they adjust upwards their prices and wages accordingly.
France, deflation, disinflation
Deflation or stagflation in the Eurozone?
Sylvester Eijffinger 15 January 2009
There are growing concerns about deflation. This column argues that inflation remains the far more relevant danger and cautions against lowering Eurozone interest rates too quickly
Assessments of European price stability risks outright reversed in recent months.1 Until summer 2008, monetary policy was concerned with inflation pressures from surging commodity and energy prices. Last month, facing possible recession, the European Central Bank (ECB) cut interest rates by an unprecedented 75 basis points. Falling commodity prices and weak demand have eased inflation.
inflation, deflation, monetary decision-making, interest rate lower bound
US price deflation on the way
John Muellbauer, Janine Aron 10 October 2008
The world is on the cusp of an inflation “turning point”, so the standard models are likely to go badly wrong. Recent research with better models suggests that the US inflation rate could become negative within the next 18 months.
Fed minutes released on October 7 disclosed that as recently as Sept 16, Fed officials thought risks to growth and inflation were roughly equally balanced. And Federal Reserve Chairman Ben Bernanke acknowledged on the same day that though the inflation outlook had improved somewhat, it remained uncertain. The market may have taken these views as representative of central banks around the world, particularly given the ECB decision of October 2 not to reduce rates.
deflation, inflation forecasting
Back to the ‘Thirties with a Twist
Barry Eichengreen 30 August 2008
Policy makers must learn from history, but they should know which historical episodes to look to. Central bankers seem to have been focusing on the 1930s, but here one of the world’s leading macroeconomists suggests that the 1970s provides more appropriate lessons.
One of the chief ways financial market participants make sense of events is by drawing parallels with the past. The subprime crisis, when it first erupted, was widely perceived as the most dangerous financial crisis since the 1930s. The implication was that it was critical to avoid the policy mistakes that transformed that earlier crisis into a macroeconomic disaster. Specifically, it was important to avoid an excessively tight monetary policy.
Economic history Monetary policy
US, monetary policy, subprime crisis, deflation
How bad is deflation in Japan?
David E. Weinstein , Christian Broda 22 October 2007
According to official statistics, Japan seems to have almost pulled out of its crippling deflation. The Japanese inflation statistics, however, are calculated using outdated methods that are well-known to overstate inflation. Recent research suggests that true Japanese deflation is probably 1 to 2 percentage points worse than suggested by official statistics.
On the face of it, Japanese deflation does not seem that severe. The latest monthly numbers suggest that over the past twelve months, the non-fresh food component of the CPI is falling at an annual rate of 0.1%. However, we believe that this number seriously understates deflation in Japan – maybe by an order of magnitude.
CPI, Japan, deflation