Francesco D'Acunto, Michael Weber, 04 January 2022

Commentators and policymakers are deeply divided about the causes, consequences, and persistence of the surge in inflation around the world as the economic activities resume after the COVID-19-induced closures. This column discusses how recent research on the dynamics of inflation and inflation expectations inform the policy debate. Consumers’ inflation expectations are an important missing piece in the puzzle policymakers are trying to solve. To avoid the self-fulfilling prophecy of inflation, central bankers might seek to communicate directly also with ordinary consumers, rather than only with financial market experts, and convince them that price increases will only be temporary.

Peter Andre, Ingar Haaland, Chris Roth, Johannes Wohlfart, 23 December 2021

Inflation has recently surged in both the US and the EU. This column uses responses from surveys of a representative sample of the US population as well as academic economists and US firm managers to show that households and managers are more likely than experts to think that the current surge in inflation will be persistent. Since the narratives individuals use to explain movements in inflation appear central to whether inflation expectations remain anchored, communication strategies by policymakers could put emphasis on specific narratives that highlight that inflationary pressures are unlikely to persist.

Jasper McMahon, Lucrezia Reichlin, Giovanni Ricco, 22 December 2021

The Federal Reserve has recently changed monetary stance and signalled a faster than anticipated pace of monetary tightening, while the ECB is more dovish. This column applies a statistical model to recent data on oil prices, inflation, expectations, labour markets and output, and finds that the model’s forecasts support the difference in stance of the two central banks. Based on an assessment of cyclical inflation being mostly driven by transitory energy price disturbances and a very small Phillips curve contribution in both jurisdictions, it predicts that in a year from now euro area HICP inflation will still be below the 2% target, at 1.75%, while in the US CPI inflation will be above, at 2.75%. 

Kristin Forbes, Joseph Gagnon, Christopher G. Collins, 21 December 2021

COVID-19 and the corresponding policy responses have generated uncertainty over inflation around the world. This column shows that when output exceeds potential, the upward pressure on prices (from reductions in slack) is far greater than any equivalent downward pressure (from increases in slack) when output is below potential. This nonlinearity in the Phillips curve, combined with the impact of global factors such as global commodity prices, global slack, exchange rates, and producer price competition, have played an important role in driving the sharp swings in inflation rates during COVID.

Alejandro Van der Ghote, 15 December 2021

Short-term interest rates, particularly the natural rate, have been in steady decline in the euro area and the US. This column argues that in economies with low natural rates, such as the euro area today, macroprudential policy can have benefits for the effectiveness of conventional monetary policy, in addition to safeguarding financial stability. Notably, macroprudential policies that curb leverage of financial intermediaries during upturns can also help stimulate aggregate demand during downturns, by containing systemic risk in financial markets.

Ewa Stanisławska, Maritta Paloviita, 26 November 2021

The responsiveness of longer-term inflation expectations to shorter-term economic developments plays an important role in inflation dynamics. Using the new ECB Consumer Expectations Survey conducted in the middle of the Covid-19 pandemic, this column explores how consumers adjust their medium-term inflation views in response to changes in short-term inflation expectations and inflation perceptions. Covid-19 contributed to an increase in consumer inflation expectations, but greater trust in the ECB is associated with more muted responsiveness of inflation expectations.

David Blanchflower, 15 November 2021

Donata Faccia, Miles Parker, Livio Stracca, 12 November 2021

Despite the increasing interest in climate change in the central bank community, we still know relatively little about the impact on medium-term inflationary pressure. This column discusses new evidence for a panel of advanced and emerging economies on the impact of very high temperatures on prices. It finds that extreme temperatures have noticeable effects on price developments even in the medium term, although more so in emerging than in advanced economies. On balance, the impact of high temperatures on prices appears to be on the upside in the short term, and on the downside in the medium term.

Jean Barthélemy, Eric Mengus, Guillaume Plantin, 13 November 2021

High levels of public debt may prevent central banks from fighting inflation. This column examines the conditions under which fiscal dominance – that is, the determination of the price level by the solvency of the government – may emerge. It argues that fiscal dominance prevails when the government has, wittingly or not, exhausted its fiscal capacity. The government may wittingly and optimally choose such a path if interest rates do not respond to fiscal expansions. In response, the central bank may find it desirable to engage into pre-emptive inflation.

Hans Gersbach, 02 November 2021

For the first time in a generation, economists are worried about inflation risks in advanced economies. Hans Gersbach argues that the risk to price stability is higher than we assume. The reason: end of tightening bank regulation and massively increased central bank reserves.

Read more about the research discussed: 

Hans Gersbach, The fragile triangle: Price stability, bank regulation and central bank reserves, CEPR Policy Insight No 112

Davide Brignone, Alistair Dieppe, Martino Ricci, 01 November 2021

There are many uncertainties surrounding the inflation outlook in the US, particularly in light of the large fiscal stimulus. Using the ECB-Global model, this column estimates the impact on inflation of the fiscal stimulus to be limited. Three scenarios are undertaken to quantify the upside risks to inflation which could arise from considering a steeper Phillips curve, stronger fiscal multipliers, and rising inflation expectations. The results suggest that the impact on inflation from these sources of risk is likely to be moderate, unless all of the risks materialise simultaneously, and the Fed does not depart from the assumed monetary policy path. 

Charles Goodhart, Manoj Pradhan, 25 October 2021

The current mini-surge in inflation is forecast to return to central bank targets towards the end of 2022, or shortly thereafter. However, there is also a risk of inflation remaining persistently high for longer. This column discusses the implications of such a contingency for central banks and monetary policy. The authors warn that sudden policy reversals could lead to severe downturns in financial markets and significantly damage public sector balance sheets. Instead, they call on central banks to develop concrete plans for dealing with persistently higher inflation, with a particular focus on their balance sheet policies in a world of rising nominal interest rates. 

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March 8 – 9, 2022, Zurich (hybrid format)
Keynote speaker: Yuriy Gorodnichenko (University of California – Berkeley)

Call for Papers Deadline: 15 November 2021

 

Call for papers
Uncertainty surrounding inflation has widened considerably across the globe since the start of the COVID-19 pandemic. Risks have shifted from persistently on the downside over the last decade to decidedly on the upside in the face of resurging demand and supply shortages as economies reopen. These developments pose considerable challenges for households, businesses, market participants, and policymakers. This conference aims to bring together insights from academics and policymakers to discuss inflation risks, their drivers, and how they propagate to the real economy and financial markets, and the extent to which policymakers can respond to these challenges.

The Swiss National Bank, the Bank for International Settlements, and the Division of International Finance of the Federal Reserve Board will jointly organize the second conference on Global Risk, Uncertainty, and Volatility. We welcome submissions within the broad themes of inflation risk and uncertainty. Some illustrative topics/questions include:

Measuring inflation risk and uncertainty

  • How to use information from financial markets, surveys, news and textual analysis, or economic variables to measure inflation risk and uncertainty?
  • Which statistical models should be used to measure and study inflation risk and uncertainty?

The transmission of inflation uncertainty to the real economy, financial markets, and financial stability

  • How do households and businesses incorporate inflation risk and uncertainty when making financial decisions?
  • Does inflation risk and uncertainty generate downside risk to economic growth, and does it also pose challenges to financial stability?
  • Can inflationary shocks in large, advanced economies trigger capital flow reversals and financial stress in EMEs?
  • Which theoretical and statistical models can shed light on the relationship between inflation risk and uncertainty, the real economy, and financial markets?
  • What is the role of uneven shocks and sectoral heterogeneity in inflation risk and uncertainty?
  • Do the effects of inflation risk and uncertainty vary across income groups or sectors and do they affect political and social strains?

The role of policy making in the resurgence and resolution of inflation risk and uncertainty

  • Which analytical frameworks should be used to study the role of inflation risk and uncertainty for optimal monetary policy?
  • What specific challenges do inflation risk and uncertainty pose for policy makers? Are these challenges affected by the extent of income inequality and debt levels?
  • What is the role of central bank communication strategies in times of high inflation risk and uncertainty?

The deadline for submissions is November 15, 2021. Please send drafts of completed papers to [email protected]. Authors of accepted papers will be informed by January 15, 2022. The conference will be held as a hybrid event with virtual and in-person presentations.

Scientific Committee
David López-Salido, Francesca Loria, and Danilo Cascaldi-Garcia (FRB)
Deniz Igan, Benoit Mojon, and Dora Xia (BIS)
Thomas Moser, Lucas M. Fuhrer, and Simone Auer (SNB)

Beatrice Weder di Mauro, 12 October 2021

Governments will need to impose more carbon taxes, but central banks need to deliver price stability. So what is the effect of these taxes on inflation and economic activity? New research examines three decades of data from Canada and Europe.
 

Read more about the research discussed and download the free discussion paper:

Gabriel Felbermayr, Alexander Sandkamp, 10 October 2021

The recent combination of resurging demand and continuing disruptions in supply chains has led to a worrying return of inflation. In the EU, industry producer prices increased by 12.2% year-on-year in July 2021. This column argues that removing EU antidumping duties would at least partially ease the pressure on input and consumer prices. In contrast, the recent abandonment of China’s differential treatment in the EU’s antidumping legislation might even have contributed to increasing import prices.

Mirco Balatti, Juan Carluccio, Francesco Chiacchio, Nuno Coimbra, Susana Parraga, Daniele Siena, Sebastian Stumpner, Fabrizio Venditti, Tina Žumer, 11 October 2021

Since the start of the pandemic, inflation has re-entered mainstream discussion. This column reviews the analysis of globalisation and inflation conducted in the context of the ECB strategy review. Although global factors (mainly commodity prices) matter for inflation synchronisation, their role in lowering both inflation and its sensitivity to the business cycle in advanced economies has been limited since the late 1980s. Global shocks can exert temporary pressure on price dynamics, but the destiny of inflation remains in the hands of central banks.

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.

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