Charles Goodhart, 13 June 2020

The correlation between monetary growth and inflation has an historic pedigree as long as your arm. This column argues that rejecting the likelihood of (eventually) rising velocity following the current massive monetary expansion requires an alternative theory of inflation that has successfully eluded all of us thus far. Ignoring the potential inflationary dangers is the equivalent to an ostrich putting its head in the sand, and while the path towards disinflation may be well known, it simply isn’t available today.

Dirk Broeders, Gavin Goy, Annelie Petersen, Nander de Vette, 19 May 2020

Inflation-linked financial instruments are widely used to infer market-based inflation expectations and inflation risk. Following the outbreak of COVID-19 and an unprecedented oil price shock, the euro five-year, five-year inflation-linked swap is currently hovering around an all-time low of just below 1%. This column shows that around 60% of the drop the swap rate since 2015 can be attributed to the inflation risk premium, while the inflation expectations component explains the remaining 40%. In addition, inflation option prices reveal that the distribution surrounding inflation expectations has shifted to the left since January 2020, suggesting that markets expect the outbreak of COVID-19 to be a persistent disinflationary shock.

Charles Goodhart, Duncan Needham, 16 May 2020

The COVID-19 crisis presents a multi-faceted challenge to policymakers. A combination of declining commodity prices, the rise in unemployment, and emergency state spending are all set to create challenging economic conditions, even as the pandemic itself subsides. This column argues that one mechanism that could help control long-run inflation levels is the issuance of long-dated gilts. This would also help to protect the young and unborn generations from the threat of resurgent inflation, which could lead to a massive rise in their future debt service requirements. 

Olivier Coibion, Yuriy Gorodnichenko, Michael Weber, 12 May 2020

Business cycles are rarely a matter of life or death in advanced economies, but the COVID-19 crisis is forcing policymakers into painful trade-offs between saving lives and saving the economy. This column uses several waves of a customised survey to study the economic costs of US lockdowns in terms of spending, labour market outcomes, and macroeconomic expectations. It finds overall spending drops of more than 30%, unemployment expectations climbing more than 10%, inflation expectations falling, uncertainty rising, and plans to purchase large durables plummeting.

Olivier Blanchard, 24 April 2020

Will falling commodity prices, stumbling oil prices, and a depressed labour market bring low inflation and perhaps even deflation, or will very large increases in fiscal deficits and central bank balance sheets bring inflation? This column argues that it is hard to see strong demand leading to inflation. Precautionary saving is likely to play a lasting role, leading to low consumption, and uncertainty is likely to lead to low investment. The challenge for monetary and fiscal policy is thus likely to be to sustain demand and avoid deflation rather than the reverse.

Olivier Blanchard, Jean Pisani-Ferry, 10 April 2020

The extraordinary operations that are under way in most countries in response to the COVID-19 shock have raised fears that large-scale monetisation will result in a major inflation episode. This column argues that so far, there is no evidence that central banks have given up, or are preparing to give up, on their price stability mandate. While there are obviously some reasons to worry, central banks are doing the right thing and the authors see no reason to panic.

David Miles, Andrew Scott, 04 April 2020

Might inflation rise as a result of policies undertaken during the current crisis and as demand comes back more strongly than supply when it ends? This column argues that it is possible, but far from clear. Indeed, there are reasons to doubt whether any rise in inflation will come. Looking back at past crises – and in particular wars – reveals some similarities but more differences with the current pandemic. There was more reason to see UK inflation rise after the three major wars of the past 220 years; and even then, the evidence that it did is not conclusive. 

Charles Goodhart, Manoj Pradhan, 27 March 2020

The authorities, like most of the rest of us, have been caught short by the sudden advent of the coronavirus pandemic, and are rightly rushing to limit unnecessary deaths. But in doing so, they are imposing a massive supply shock. This column asks what will happen when the lockdown gets lifted and recovery ensues, following this period of massive fiscal and monetary expansion. It argues that we will see a surge in inflation that can only be tackled once indebtedness has been restored to viable levels.

Masayuki Morikawa, 10 February 2020

Although long-term macroeconomic forecasts substantially affect the sustainability of government debt and the social security system, they cannot avoid significant uncertainty. This column assesses whether academic researchers in economics make accurate long-term growth forecasts, comparing ten-year growth forecasts made by Japanese economists in 2006–2007 with the realised figures. Even excluding the years affected by the Global Crisis, the results show that forecasts tend to be biased upwards and involve significant uncertainty, even for economics researchers specialising in macroeconomics or economic growth.

Michael Ehrmann, Marek Jarociński, Christiane Nickel, Chiara Osbat, Andrej Sokol, 05 February 2020

Inflation in advanced economies fell by less than expected in the wake of the financial crisis, while more recently, measures of slack and underlying inflation in the euro area have seen a disconnect. These and other inflation developments since the Global Crisis have surprised policymakers, practitioners, and academics alike. This column outlines the evidence presented at a recent ECB conference which aimed at enhancing collective understanding of the drivers and dynamics of inflation. 

Laurence Ball, Sandeep Mazumder, 04 February 2020

Inflation did not fall as much as the textbook Phillips curve would predict during Europe’s recessions of 2008 and 2011, and it has not risen as much as the theory would predict during recovery. This column argues that adapting the Phillips curve to use a weighted median of industry inflation rates results in a much better fit with observed inflation. Adding the effect of headline inflation shocks improves the fit further.

Klaus Adam, Henning Weber, 04 December 2019

Consumer goods prices systematically depend on product age. This column analyses this dependence and shows that relative prices tend to fall during the product lifecycle. It uses insights from a sticky price framework to demonstrate how these price trends matter for aggregate inflation and the optimal inflation rate

Francesco D'Acunto, Ulrike Malmendier, Michael Weber, 15 November 2019

Policymakers seek to manage inflation expectations, but we understand little about how households form and update their expectations of inflation. The column tests Lucas's conjecture that the price changes households observe, rather than all price changes, drive expectations. A measure of individual household consumption weighted by the frequency of purchase is a statistically and economically significant driver of households' expectations. This challenges the modelling assumptions that central bank policymakers currently make.

Jesper Lindé, Mathias Trabandt, 12 November 2019

The alleged breakdown of the Phillips curve has left monetary policy researchers and central bankers wondering if we need to develop completely new models for price and wage determination. This column argues that a relatively small alteration of the standard New Keynesian model, combined with using the nonlinear instead of the linearised solution, is sufficient to resolve the two puzzles – the ‘missing deflation’ during the recession and the ‘missing inflation’ during the recovery – underlying the supposed breakdown.

Anthony Edo, Jacques Melitz, 10 November 2019

Economists mostly argue that the Great Inflation in renaissance Europe was caused by an inflow of silver. Historians counter that it was caused by population growth. The column uses long-run economic data to argue that the historians' position is credible for England's economy. On this evidence, both contributed equally to inflation during this period.

Francesco Corsello, Stefano Neri, Alex Tagliabracci, 05 November 2019

Concerns about the anchoring of long-term inflation expectations to the ECB Governing Council’s aim have re-emerged since early 2019. Using data from the ECB’s Survey of Professional Forecasters, this column argues that long-term inflation expectations have de-anchored from the ECB’s inflation objective. They have not returned to the levels that prevailed before the 2013-14 period of disinflation, and their distribution is still skewed towards lower inflation levels. Moreover, long-term expectations have become sensitive to short-term ones and to negative inflation surprises. 

Thomas Hasenzagl, Filippo Pellegrino, Lucrezia Reichlin, Giovanni Ricco, 16 October 2019

What is happening to inflation and output in the euro area? The ECB has apparently lost the ability to raise inflation and price expectations have been sliding since the last recession. Much of the policy debate has focused on the flattening of the Phillips curve. Yet, as this column shows, estimations of the joint output-inflation process point to a decline of both output potential and trend inflation as the most relevant elements of the puzzle. 

Philippe Andrade, Jordi Galí, Hervé Le Bihan, Julien Matheron, 01 October 2019

How to adjust to structurally lower real natural rates of interest is a challenging but inescapable issue for central bankers. Using simulation and US data, this column studies how changes in the steady-state natural interest rate affect the optimal inflation target. It finds that starting from pre-crisis values, a 1 percentage point decline in the natural rate should be accommodated by an increase in the optimal inflation target of about 0.9 to 1 percentage point. It also discusses alternatives to adjusting the target, such as non-conventional monetary policies. 

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