Interest rates are at historic lows in advanced nations around the world and markets expect them to stay low for years. This column introduces the 17th CEPR-ICMB Geneva Report on the World Economy, “Low for Long? Causes and Consequences of Persistently Low Interest Rates”. Written by four world-renowned macroeconomists, the report suggests that real interest rates will eventually return to more normal levels, but in the meantime deflationary traps are more likely, as are financial boom-bust cycles.
Charles Bean, 23 October 2015
Hiroshi Yoshikawa, Hideaki Aoyama, Yoshi Fujiwara, Hiroshi Iyetomi, 05 September 2015
Deflation is a threat to the macroeconomy. Japan had suffered from deflation for more than a decade, and now, Europe is facing it. To combat deflation under the zero interest bound, the Bank of Japan and the European Central Bank have resorted to quantitative easing, or increasing the money supply. This column explores its effectiveness, through the application of novel methods to distinguish signals from noises.
Stefano Neri, Stefano Siviero, 15 August 2015
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.
Claudio Borio, Magdalena Erdem, Andrew Filardo, Boris Hofmann, 11 April 2015
Concerns about deflation – falling prices of goods and services – are rooted in the view that it is very costly. This column tests the historical link between output growth and deflation in a sample covering 140 years for up to 38 economies. The evidence suggests that this link is weak and derives largely from the Great Depression. The authors find a stronger link between output growth and asset price deflations, particularly during postwar property price deflations. There is no evidence that high debt has so far raised the cost of goods and services price deflations, in so-called debt deflations. The most damaging interaction appears to be between property price deflations and private debt.
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.
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.
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.
Enrique 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.
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.
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
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.
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.
David 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.