Will the US inflate away its public debt?
Ricardo Reis, Jens Hilscher, Alon Raviv 07 August 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.
Should the US Federal Reserve raise the inflation target from its current level of 2%? And will it? One benefit would be to make hitting the zero lower bound less likely, which would lead to less severe recessions, as Olivier Blanchard, Giovanni Dell’Ariccia, and Paolo Mauro (2010), Daniel Leigh (2010), and Laurence Ball (2013) have argued on this website.
inflation, monetary policy, public debt, seignorage
What are the macroeconomic effects of asset purchases?
Martin Weale, Tomasz Wieladek 10 June 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.
After policy rates fell close to zero in response to the global financial crisis of 2008-09, the scope for further conventional monetary policy easing was exhausted. As a result, both the Bank of England and the Federal Reserve embarked on large-scale asset purchases of government and financial securities (see Figures 1 and 2).
inflation, Federal Reserve, Phillips curve, Bank of England, quantitative easing, unconventional monetary policy, output
Disagreement about inflation expectations: The case of Japanese households
Shusaku Nishiguchi, Jouchi Nakajima, Kei Imakubo 02 May 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.
It is well known that inflation expectations vary across agents. Nevertheless, this fact has attracted little attention. Analysis of inflation expectations typically tend to focus on measures such as the mean and the median of such expectations. One of the distinguished exceptions is Mankiw et al. (2003), who discuss in a context of sticky information how the disagreement in US households' inflation expectations was evolving through the Volcker disinflation. Our recent research (Nishiguchi et al. 2014) has brought the disagreement issue once again to the fore.
inflation, Japan, inflation expectations
Is the Phillips curve alive and well after all? Inflation expectations and the missing disinflation
Olivier Coibion, Yuriy Gorodnichenko 15 November 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.
“Prior to the recent deep worldwide recession, macroeconomists of all schools took a negative relation between slack and declining inflation as an axiom. Few seem to have awakened to the recent experience as a contradiction to the axiom.” (Bob Hall, 2013.)
“The surprise [about inflation] is that it’s fallen so little, given the depth and duration of the recent downturn. Based on the experience of past severe recessions, I would have expected inflation to fall by twice as much as it has.” (John Williams, 2010.)
Global crisis Monetary policy
inflation, Phillips curve, expectations, oil, global crisis, disinflation, Great Recession
Independent monetary policies, synchronised outcomes
Espen Henriksen, Finn Kydland, Roman Šustek 02 October 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.
The recession in the Eurozone has given new life to optimal-currency-area thinking. The argument goes that the disadvantages of a single currency come from the loss of flexibility and ability to use monetary policy to respond to “asymmetric shocks” (Krugman and Obstfeld 2009). The often-unarticulated presumption is that countries with independent monetary policies would make different policy decisions as long as contemporaneous shocks to output and employment were asymmetric.
Exchange rates Monetary policy
inflation, monetary policy, EMU, Central Banks, capital controls, exchange-rate policy
Why is housing such a popular investment? A new psychological explanation
Thomas Alexander Stephens, Jean-Robert Tyran 23 November 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.
In the wake of the economic crisis that began in 2007, homeowners in many countries have faced substantial losses. Prices have fallen in both nominal and real terms. In the US, for example, house prices in the first quarter of 2012 were down more than 40% in real terms from their peak (Shiller 2012). Nevertheless, housing remains a popular investment1.
inflation, house prices, housing
The housing market and the case for higher inflation targets in the US and the Eurozone
Joshua Aizenman, Menzie D. Chinn 15 May 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.
The eloquent advocacy for moderate inflation at times of peril goes back to Irving Fisher’s seminal paper on the debt deflation:
Macroeconomic policy Monetary policy
US, inflation, housing market, Eurozone crisis
ECB inflation-fighting powers remain intact
Christian Thimann 30 March 2012
A recent Vox column argued that with the three-year liquidity operations, the ECB has “hit a limit in its ability to prevent an acceleration of inflation”. This column explains why the ECB’s inflation-fighting powers remain intact – and why the risks of a sudden inflationary spike remain low.
In a recent Vox column, Aaron Tornell and Frank Westermann (2012) argue that with the conduct of three-year liquidity operations, the ECB has “hit a limit in its ability to prevent an acceleration of inflation”. They take issue with a statement by ECB President Mario Draghi that the ECB would react promptly to a worsening inflation outlook.
EU policies Europe's nations and regions Monetary policy
ECB, inflation, Eurozone crisis
Has the ECB hit a limit?
Aaron Tornell, Frank Westermann 28 March 2012
“Should the inflation outlook worsen, we would immediately take preventive steps”. So said Mario Draghi, President of the European Central Bank. This column argues that these are brave words given that the ECB has hit a limit in its ability to prevent an acceleration of inflation.
In December, the ECB successfully forestalled a financial crisis by stepping in with a big bazooka and inundating the market with liquidity. Unfortunately, the big bazooka has come at a cost; the composition of the ECB’s balance sheet has changed dramatically.
EU policies Europe's nations and regions Monetary policy
ECB, inflation, Eurozone crisis
Financial repression: Then and now
Carmen M Reinhart, Jacob Funk Kirkegaard 26 March 2012
Rich nations worldwide have a problem with debt. In the past, such problems have been dealt with by several tactics, including 'financial repression'. This column explains how the tactic works and documents its resurgence in the wake of the global and Eurozone crises.
In light of the record or near-record levels of public and private debt, debt-reduction strategies are likely to remain at the forefront of policy discussions in most of the advanced economies for the foreseeable future (Reinhart and Sbrancia 2011).
Throughout history, debt-to-GDP ratios have been reduced by:
International finance Macroeconomic policy
inflation, debt, financial repression