Martin Weale, Tomasz Wieladek, 24 September 2021

Quantitative easing is often criticised due to side effects on asset price valuation and risk taking. This column compares the financial side effects of conventional monetary policy to those of quantitative easing, based on the amount of inflation generated by each policy. A systematic comparison of multiple measures of financial side effects for the euro area, the UK, and the US suggests that the side effects of quantitative easing and conventional monetary policy are roughly the same.   

Willi Koll, Andrew Watt, 10 September 2021

Inflation in the euro area has been well below the ECB’s target since 2013. This column proposes institutionalising nominal wage setting within the economic governance of the euro area to bring inflation on target. Such a policy would also address the built-in tendency for divergences in internal demand dynamics and competitiveness within the euro area. 

Philipp F. M. Baumann, Enzo Rossi, Alexander Volkmann, 20 August 2021

After bouts in the 1970s and 1980s, consumer price inflation has been trending downward since the 1990s. Recently, voices fearing a pick-up in inflation have become more numerous and louder. This column describes the main forces acting on inflation in 122 countries over the last two decades, with the aim of informing the current debate. While energy prices act strongly on inflation, factors such as central bank independence or inflation targeting have little explanatory power.

Elena Bobeica, Benny Hartwig, Christiane Nickel, 20 August 2021

The initially muted reaction of euro area inflation to the recent recession suggests that the Phillips curve is flat or may have flattened during the pandemic. This column argues that the assessment of the Phillips curve has become more complicated due to numerous confounding factors. It discusses evidence that underlying inflationary pressures have been dampened by the build-up of slack, and that models accounting for tail events reveal more stable Phillips curve parameters. Despite the many confounding factors, it seems that the Phillips curve is still at play – even if it is hard to pin down precisely.

Jongrim Ha, M. Ayhan Kose, Franziska Ohnsorge, 17 August 2021

Understanding the dynamics of inflation requires a comprehensive database that covers a large number of countries over a long period. This column introduces a new global database of inflation that has a significantly larger coverage than other databases as it includes multiple measures of inflation for up to 196 countries over 1970-2021. The database can be used in a variety of contexts. A few potential applications are illustrated, analysing the evolution of inflation since 1970, the behaviour of inflation during global recessions, and the synchronisation of inflation across countries and over time,

Liviu Voinea, Prakash Loungani, 16 August 2021

Over the past three decades, post-crisis inflation in OECD economies has only picked up once the gap between current wages and peak pre-crisis wages has closed. This column explores the role of the cumulative wage gap in driving inflation, with a particular focus on Covid-19. The authors argue that the increase in inflation in recent months, which appears driven by one-off increases in income and supply bottlenecks, will not be sustained, as long as cumulative wage gaps remain wide.

Lucrezia Reichlin, Giovanni Ricco, Matthieu Tarbé, 05 August 2021

Monetary policy has fiscal implications since its effect on interest rates, inflation and output relaxes or tightens the general government inter-temporal budget constraint. Inflation dynamics is the result of both monetary policy and the fiscal response to it via the adjustment of the primary deficit. This column discusses estimates of the fiscal responses to monetary policy in the euro area. It shows that the more modest impact of unconventional monetary policy easing on inflation, if compared with the impact of conventional easing, can be explained by a more modest increase in the primary deficit in the former case.

Martin Ravallion, 03 August 2021

Economists have long debated the most effective metrics for measuring poverty and inequality. This column presents analysis of the relative importance of three prominent macroeconomic indicators – the rate of unemployment, the inflation rate, and the growth rate of GDP per capita. Using evidence from the US, the author argues that higher unemployment rates unambiguously increase poverty measures, but that inflation matters more in the middle and upper-middle of the distribution than in the tails.

Maximilian Konradt, Beatrice Weder di Mauro, 29 July 2021

Model-based studies on the effect of carbon taxation point to sizeable inflationary effects. This column uses evidence from Canada and Europe over the past three decades to show that carbon taxes changed relative prices but did not increase the overall price level. Instead, they were slightly deflationary. In the case of British Columbia, the driver may have been a fall in household income depressing the prices of non-energy goods, which more than offset rising energy prices. The income compression was most pronounced among the richest households, suggesting that the redistribution scheme achieved its intended aim of favouring low-income households.

Dennis Bonam, Andra Isabela Smădu, 18 July 2021

How did past major pandemics affect inflation dynamics? This column estimates the long-run effects of pandemics on trend inflation in Europe using historical data since the 14th century. We find that, following a pandemic event, trend inflation falls steadily below its initial level for nearly a decade. This long-run depressing effect is also observed in major individual European countries – France, Germany, Italy, the Netherlands, and the UK. The authors conclude by discussing why the effects of the COVID-19 pandemic on inflation could play out differently this time around.

Jongrim Ha, M. Ayhan Kose, Franziska Ohnsorge, 14 July 2021

Global inflation has rebounded from last year’s lows faster and sooner than after any previous global recession in the past five decades. This column presents model- and survey-based estimates which suggest that global inflation will rise by about 1-1.4 percentage points this year, pushing it above target in about half of inflation-targeting emerging market and developing economies. This may not be reason for concern provided the increase is temporary and inflation expectations remain well-anchored. However, even if temporary, higher global inflation may complicate the near-term policy choices of economies that still rely on expansionary support measures to ensure a durable recovery. 

Sebastian Schmidt, 06 July 2021

Inflation shortfalls across the developed world have raised concerns about the possibility of low-inflation traps. This column presents a simple model of inflation to analyse the role of stabilisation policy in preventing them. It suggests that decisive countercyclical fiscal policy can protect economies from falling into a low-inflation trap by offsetting low inflation expectations. 

Philippe Martin, Eric Monnet, Xavier Ragot, Thomas Renault, Baptiste Savatier, 05 July 2021

The pandemic has caused the ECB to push its tools to their extremes. Despite considerably expanding its balance sheet and maintaining negative interest rates, inflation in the euro area remains below target. This column argues that direct transfers by the ECB to individuals, or ‘helicopter money’, should be considered as a viable contingent policy. It estimates that a transfer of 1% of GDP would increase inflation by 0.5 percentage points. A well-communicated policy with a clear exit strategy would be consistent with the ECB’s inflation targeting objective and maintain a clear boundary with fiscal policy. 

Philipp F. M. Baumann, Enzo Rossi, Michael Schomaker, 02 July 2021

The notion than an independent central bank reduces a country’s inflation has been embraced by academics, central bankers, and politicians all over the world. This is somehow puzzling, giving the ambiguity reported in empirical studies. This column argues that overall there is only a weak causal link from independence to inflation, if at all. Even a strong inflation-boosting impact from introducing central bank independence cannot be ruled out. These results are obtained from a statistical approach that has not yet been used in analyses of macroeconomic processes, although it exhibits properties well-suited to this end.

Philipp Hartmann, Glenn Schepens, 12 May 2021

The 2020 ECB Forum on Central Banking addressed some key issues from the ongoing monetary policy strategy review and embedded them in discussions of major structural changes in advanced economies and the post-COVID recovery. In this column, two of the organisers highlight some of the main points from the papers and debates, including whether globalisation is reversing, implications of climate change, options for formulating the ECB's inflation aim, challenges with informal monetary policy communication, relationships between financial stability and monetary policy, how to make a monetary policy framework robust to deflation or inflation traps and the role of fiscal policy for the recovery from the pandemic.

Kevin Daly, Rositsa D. Chankova, 15 April 2021

The economic consequences of Covid-19 are often compared to a war, prompting fears of rising inflation and high bond yields. However, historically, pandemics and wars have had diverging effects. This column uses data extending to the 1300s to compare inflation and government bond yield behaviour in the aftermath of the world’s 12 largest wars and pandemics. It shows that both inflation and bond yields typically rise in wartime but remain relatively stable during pandemics. Although every such event is unique, history suggests high inflation and bond yields are not a natural consequence of pandemics. 

Gavin Goy, Meilina Hoogland, Annelie Petersen, 15 March 2021

On the back of fiscal accommodation, a rebounding economy, and the Federal Reserve’s newfound tolerance for inflation overshoots, market-based inflation measures have surged, triggering concerns of an overheating of the US economy. By decomposing recent yield curve movements, this column shows that the steepening of the US Treasury curve corresponds with higher real term premia and a boost in both inflation expectations and the inflation risk premium. Lower real rate expectations suggest that markets do not yet expect the Fed to lean against the fiscal expansion. Simultaneously, the width of the distribution suggests that markets are relatively uncertain about the exact degree of overshooting the Fed will allow before stepping in. 

Gene Ambrocio, Andrea Ferrero, Esa Jokivuolle, Kim Ristolainen, 06 March 2021

Central banks often have inflation targets at the centre of their monetary policy regimes. This column presents survey data from 613 leading economists to explore their views on these inflation targets and wider policies within their countries of residence. The results suggest that maintaining the prevailing inflation target (for central banks that have one) has more support than changing it does. But more respondents are pessimistic about central banks’ ability to meet these targets, particularly in the euro area.

Manoj Pradhan, Charles Goodhart, 26 February 2021

Milton Friedman and Bill Phillips most likely assumed that their separate methods for predicting inflation would lead to much the same outcomes. Recently, however, monetary aggregates and the Phillips curve have provided extremely disparate signals. This column discusses recent economic developments leading to these disparate signals, concluding that inflation will most likely end up somewhere between the predictions of the two models – which is almost certainly higher than what central banks and the IMF are expecting.

Ioana Duca-Radu, Geoff Kenny, Andreas Reuter, 09 February 2021

When interest rates cannot go any lower, the economy can be stabilised if consumers expect the rate of inflation to increase. Yet, the evidence for this stabilising effect has been very mixed. This column presents new evidence from a monthly survey of over 25,000 individual consumers across the euro area, showing that consumers are indeed more ready to spend if they expect inflation to be higher in the future. While generalised in the population, the stabilising effect is stronger when nominal interest rates ­are constrained at the lower bound.

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