Klaus Adam, Henning Weber, 26 September 2017

The productivity of many firms evolves over time, which impacts the optimal inflation rate, that is, the rate of price increase with the least distortionary effect on relative goods prices. This column presents estimates for the US that suggest that, due to firm-level productivity changes, the optimal inflation rate has dropped from somewhat over 2% in the mid-1980s to a current level of roughly 1%.

Mojmir Hampl, Tomas Havranek, 12 September 2017

Seven out of every ten Europeans live in their own homes, yet Europe’s most important inflation measure excludes the costs associated with owner-occupied housing. This column argues that including the costs of home ownership would prove beneficial to the conduct of monetary and macroprudential policy. It would also bring the measure closer to what most people consider inflation to be.

Stefan Gerlach, 01 August 2017

With the Eurozone in recovery, at some stage the ECB will raise interest rates. This column examines the conditions that might lead to this happening. A statistical analysis suggests that the likelihood of an interest rate increase is currently about 7%, but a combination of stronger growth and higher price pressures could quickly raise this to about 30%. A return of the ECB to its pre-crisis behaviour would also lead to a dramatic rise in the likelihood of an interest rate increase.

Christiane Nickel, 28 July 2017

The past decade has seen a growing role for global slack in Phillips curve approaches, as opposed to the traditional focus on domestic slack. This column explores whether augmenting Phillips curves by measures of foreign slack can help to better explain past developments in underlying inflation. A majority of specifications, both with and without foreign slack, are found to yield very similar results. Even for periods when domestic slack differed substantially from foreign slack, like between 2012 and 2016, the effects seem to be rather small.

Charles Abuka, Ronnie Alinda, Camelia Minoiu, José-Luis Peydró, Andrea Presbitero, 29 June 2017

Existing studies suggest that the effects of monetary policy in developing countries on credit and the real economy are weak. This column challenges this view using rich loan-level credit register data from Uganda. It shows that monetary policy tightening significantly reduces credit supply – especially for banks with greater leverage and sovereign debt exposure – and identifies spillovers on inflation and economic activity. The effects are larger in more financially developed areas, highlighting the importance of financial development for policy effectiveness.

Andrew Scott, 12 June 2017

What is the right level of government debt and what type of debt should be issued? In this video, Andrew Scott discusses how long-term bonds affected the level of national debt. This video was recorded at the Royal Economic Society Annual Conference held in Bristol in April 2017.

Myrvin L. Anthony, Narcissa Balta, Tom Best, Sanaa Nadeem, Eriko Togo, 06 June 2017

The case for state-contingent debt instruments, linking contractual debt to a pre-defined variable, has been theorised but not developed. This column gives a historical perspective of the issuance of these instruments to alleviate liquidity and/or solvency pressures on the sovereign in ‘normal times’ and during restructurings. It also discusses the valuable lessons that inflation-linked bonds provide for development of the state-contingent debt instrument market.

Stefan Gerlach, 05 June 2017

In many economies, inflation may have remained stubbornly low during the recovery because their Phillips curves have become flatter. This column uses an analysis of Swiss data since 1916 that support this argument. The most recent structural break in the Swiss Phillips curve occurred in 1994, when it became much flatter. Previous structural breaks suggest that this has been a change from an above-average to a below-average slope, not a collapse from the long-term normal level.

James Stock, 02 June 2017

How do unexpected changes in the economy affect inflation or GDP growth rate? In this video, James Stock explains how unexpected changes can be isolated. This video was recorded at the Royal Economic Society Annual Conference held in Bristol in April 2017.

Fredrik Andersson, Lars Jonung, 08 May 2017

Inflation-targeting central banks commonly fail to hit their official inflation targets, so targets are combined with a tolerance band which is either implicit or explicit. Taking the Swedish Riksbank as an example, this column argues that adopting an explicit tolerance band would better communicate to the public the central bank’s lack of full control over the rate of inflation and thus foster public confidence in monetary policy, and it would also increase the central bank’s ability to stabilise the economy. The width of the band can be derived from the historical inflation outcome. 

Ed Balls, Anna Stansbury, 01 May 2017

Until recently, the independence granted to the Bank of England 20 years ago had gone unchallenged. But the financial crisis has raised questions over whether central bank independence is necessary, feasible, and democratic. This column revisits the relationship between inflation and the operational and political independence of the central bank in advanced economies. The findings support the Bank of England model of monetary policy independence: fully operationally independent, but somewhat politically dependent. To make operational independence work, however, further reforms are needed to the model in both monetary–fiscal coordination and macroprudential policy.

Raphael Auer, Claudio Borio, Andrew Filardo, 28 April 2017

In the past two decades, international trade has been transformed by the rise of global value chains. This column suggests that the rise of global value chains can help resolve the puzzle of the increasingly global nature of domestic inflation. Their expansion has greatly increased international competition for both intermediate and final goods and services, meaning price pressures arising from economic slack in one country become more relevant for others. This may be changing the trade-offs central banks face when managing domestic inflation.

Michael Bordo, 23 April 2017

Beginning in 1944, the Bretton Woods system played a major role in shaping the global economy in the post-war period. This column describes how although it was successful in bringing about exemplary and stable economic performance in the 1950s and 1960s, familiar confidence and liquidity problems, as well as inflationary pressure and central bankers’ responses to it, ensured that Bretton Woods was short-lived. Nonetheless, legacies of the system, like the dollar standard, remain with us and will likely be with us for some time to come.

Laurence Ball, Anusha Chari, Prachi Mishra, 14 April 2017

The inflation rate in India rose from 3.7% to 12.1% between 2001 and 2010, raising concerns that it will rise again. This column separately analyses India's core and headline inflation rates and argues that the average level of core inflation has been consistently less than that of headline inflation. Short-term volatility in prices, especially for food, has driven India’s headline inflation. Estimating a Phillips curve suggests a core inflation–output trade-off in India similar to that of advanced economies during the 1970s and 1980s.

Paul Whelan, 10 February 2017

Investing in stocks instead of bonds is risky. In this video, Paul Whelan discusses the importance of expected inflation. This video was recorded at the Brevan Howard Centre for Financial Analysis in December 2016.

Morten Ravn, Vincent Sterk, 11 January 2017

Recent economic events cast doubt on the standard macroeconomic models. This column looks at new economic models built on the idea that inequality and income risk matter for the business cycle and long-run outcomes. While still in their infancy, these models show promise in addressing the concerns about the old New Keynesian models, and in bringing about a shift in the way that macroeconomists think about aggregate fluctuations and stabilisation policy. 

Stephen Cecchetti, Kim Schoenholtz, 07 December 2016

The Bank of Japan has recently implemented one of the largest central bank policy shifts in modern times, raising its inflation target explicitly to 2% and kicking off the most rapid balance sheet expansion among the leading central banks. This column assesses this policy decision and its potential pitfalls, and compares it to similar policies enacted in the past. Unless policy has a significantly larger impact on financial conditions going forward than it has to date, the revised framework will likely be insufficient to achieve the Bank’s inflation target any time soon.

Stefan Gerlach, Rebecca Stuart, 17 November 2016

The ‘dot plots’ that the Federal Open Market Committee has been publishing since 2012 have attracted a great deal of attention, but are difficult to interpret because changes in them reflect a combination of new information and changes in the projections horizon. This column addresses how the Committee members’ views of monetary policy have evolved in recent years, and have they have responded to changes in the macroeconomic environment.

Luca Dedola, Luc Laeven, 15 November 2016

In September 2016, the ECB held its first Annual Research Conference. This column surveys the contributions to the conference, which brought together policymakers and academics from around the world to promote discussion of topics at the forefront of monetary and financial economic research. Nobel laureate Eric Maskin gave the keynote lecture, addressing whether fiscal policy should be set by politicians, and the conference included eight further presentations and a panel discussion on monetary policy and financial stability.

Bruce Kasman, Joseph Lupton, 03 November 2016

Over the past two years, a significant disinflationary impulse has dampened nominal activity around the world. As this disinflationary impulse fades, however, both nominal and real growth should normalise. Indeed, as this column highlights, the latest signs show inflation and inflation expectations rising, profits stabilising, and capital expenditure inching up.