EZ inflation has been falling steadily since early 2013, turning negative in late 2014. This column surveys a host of recent research from Banca d’Italia that examined the drivers of this fall, its macroeconomic effects, and ECB responses. Aggregate demand and oil prices played key roles in the drop, which has consistently ‘surprised’ market-based expectations. Towards the end of 2014 the risk of the ECB de-anchoring inflation expectations from the definition of price stability became material.
Stefano Neri, Stefano Siviero, Saturday, August 15, 2015
Stefan Gerlach, Reamonn Lydon, Rebecca Stuart, Tuesday, July 21, 2015
Despite being a mainstay of macroeconomic theory for the past half century, the Phillips curve often receives the death knell from various commentators. These critiques often rely on results from data samples spanning relatively short periods. Using the case of Ireland, this column argues that short-term idiosyncrasies can explain the failure of the model in these contexts. Taking a longer historical view, the Phillips curve remains a useful macroeconomic model, at least in the Irish context.
Martin Brown, Ralph De Haas, Vladimir Sokolow, Saturday, March 14, 2015
Financial dollarisation, the widespread holding of assets and liabilities in a foreign currency, is often viewed as a threat to financial stability in emerging markets. However, there is not enough evidence that monetary policy is responsible for low dollarisation. This column uses cross-regional evidence from Russia to show that monetary stability is indeed a key determinant of dollarisation. Moreover, banking integration strongly influences how households and firms adjust the currency composition of their assets and liabilities to changes in monetary conditions.
Charles A.E. Goodhart, Monday, March 2, 2015
Following the Warsh Review, the recording, number, and timing of the Bank of England’s Monetary Policy Committee meetings will change. This column argues that the recording may make the decision meeting more formal and could inhibit debate, although the eight-year gap before publishing transcripts ameliorates this concern. Having fewer MPC meetings is a good thing, and reduces ‘noise’ around monetary policy. The revised meeting schedule will not add to transparency and raises the risk of leaks and ‘news shocks’.
Johannes Stroebel, Joseph Vavra, Monday, January 26, 2015
Rising prices have long been a concern of monetary policymakers due to wealth effects on spending. This column presents evidence that local demand effects from house price increases result in significant local price inflation. Households living in locations with rapidly increasing real estate prices will also face rapidly increasing costs of goods purchased in local stores.
Laurence Ball, Sandeep Mazumder, Wednesday, January 7, 2015
Researchers have put forward two explanations for the failure of the US inflation rate to fall as far during the Great Recession as the Phillips curve would predict. Either expectations have been successfully anchored by the Fed’s inflation target, or the Phillips curve is focusing on the wrong thing – aggregate unemployment instead of short-term unemployment. This column shows that the two explanations are complementary; together, they explain the puzzle, but separately they cannot.
Philippe Andrade, Richard Crump, Stefano Eusepi, Emanuel Moench, Tuesday, December 23, 2014
Expectations are critical for macroeconomics and financial markets. But the expectation-formation process is not well understood. This column discusses some empirical characteristics of forecast disagreement from professional forecasters in the US, and discusses the ‘information frictions’ that underlie the heterogeneity of expectations.
John Muellbauer, Tuesday, December 23, 2014
Eurozone deflation is likely to become reality when the annual inflation figure for 2014 is announced in January. This column argues that the ECB should develop a strategy that works in the Eurozone’s unique financial setting, instead of following the Fed’s lead. The author proposes that the ECB should pursue ‘quantitative easing for the people’, such as sending each adult citizen a €500 cheque.
Jean-Pierre Landau, Tuesday, December 2, 2014
Eurozone inflation has been persistently declining for almost a year, and constantly undershooting forecasts. Building on existing research, this column explores the conjecture that low inflation in the Eurozone results from an excess demand for safe assets. If true, this conjecture would have definite policy implications. Getting out of such a ‘safety trap’ would necessitate fiscal or non-conventional monetary policies tailored to temporarily take risk away from private balance sheets.
Alberto Cavallo, Guillermo Crucas, Ricardo Perez-Truglia, Monday, November 10, 2014
Although central banks have a natural desire to influence household inflation expectations, there is no consensus on how these expectations are formed or the best ways to influence them. This column presents evidence from a series of survey experiments conducted in a low-inflation context (the US) and a high-inflation context (Argentina). The authors find that dispersion in household expectations can be explained by the cost of acquiring and interpreting inflation statistics, and by the use of inaccurate memories about price changes of specific products. They also provide recommendations for central bank communication strategies.
Andrew K Rose, Monday, October 6, 2014
Governments benefit from inflation since the real value of public debt falls but inflation is a tax on money holders. Bond holders are aware of this fact and act accordingly. This column explores empirically the role of bond markets in keeping inflation low. The existence of long, nominal, local-currency bonds lowers inflation by three to four percentage points. The results hold for inflation-targeting countries, and other monetary regimes do not have the same effects.
Hugh Rockoff, Saturday, October 4, 2014
World War I profoundly altered the structure of the US economy and its role in the world economy. However, this column argues that the US learnt the wrong lessons from the war, partly because a halo of victory surrounded wartime policies and personalities. The methods used for dealing with shortages during the war were simply inappropriate for dealing with the Great Depression, and American isolationism in the 1930s had devastating consequences for world peace.
Olivier Blanchard, Friday, October 3, 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.
Ricardo Reis, Jens Hilscher, Alon Raviv, Thursday, August 7, 2014
Faced with daunting levels of public debt, it may be tempting to inflate away the burden. Some recent research has endorsed such a policy, but this column argues that it is infeasible. The rule of thumb that suggests an inflation rate four percentage points higher would reduce debt by 20% ignores creditor composition and maturity details, even if a 6% inflation rate were achievable. The hard truth is that there is no easy way out of debt.
Martin Weale, Tomasz Wieladek, Tuesday, June 10, 2014
After reducing their policy rates close to zero in response to the global financial crisis, the Bank of England and the Federal Reserve began purchasing assets. This column assesses the effect of these asset purchases on output and inflation. In line with previous studies, the authors find that asset purchase announcements are associated with increases in both output and inflation in both countries. They also find that quantitative easing had a larger impact on UK inflation, which suggests that the UK Phillips curve is steeper.
Shusaku Nishiguchi, Jouchi Nakajima, Kei Imakubo, Friday, May 2, 2014
Inflation expectations are not fully captured with a single number. One important aspect is the degree of "disagreement" or "dispersion" in such expectations. This column discusses how the distribution of Japanese households' medium-horizon inflation expectations evolved using survey data. As prices have been rising since 2013, the expectations distribution showed a decrease in respondents expecting deflation or high inflation, and there was a substantial increase in respondents expecting moderate inflation.
Olivier Coibion, Yuriy Gorodnichenko, Friday, November 15, 2013
During the Great Recession, advanced economies have not experienced the disinflation that has historically been associated with high unemployment. This column shows that using consumers’ (as opposed to forecasters’) inflation expectations restores the traditional Phillips curve relationship for recent years. Consumers’ inflation expectations are more responsive to oil prices than those of professional forecasters. The increase in oil prices between 2009 and 2012 may in fact have prevented the onset of pernicious deflationary dynamics.
Espen Henriksen, Finn Kydland, Roman Šustek, Wednesday, October 2, 2013
The monetary policy for Eurozone members is one-size-fits-all in an economic area rife with economic differences. Does this really make a difference? This column argues that even if each EZ member state had a fully independent monetary authority, monetary policies would likely still appear highly synchronised across EZ members.
Thomas Alexander Stephens, Jean-Robert Tyran, Friday, November 23, 2012
Despite its meagre real returns in the long run, many people still think that investing in housing is a good idea. This column argues that a major reason for the tendency to buy houses is that it’s rare to lose money. Recent research shows people’s perceptions of housing transactions to be shaped by whether they gain or lose money – above and beyond the real returns.
Joshua Aizenman, Menzie D. Chinn, Tuesday, May 15, 2012
Might more inflation be good for the US and Europe? This column looks at the housing market in the US and argues that, with houses dropping in price, buyers are playing a waiting game. And as buyers keep delaying, the price drops further. Given the importance of property in many economies, the knock-on effects are severe. Yet one way to break this vicious cycle is with inflation.