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.

Olli Rehn, 13 January 2021

Global population ageing will lead to a trend reversal, with saving rates falling, real wages increasing, and greater inflationary pressures. The change in China’s economic model from forced saving towards increased consumption is amplifying this trend. This column reviews a new book by Charles Goodhart and Manoj Pradhan in which the authors examine megatrends reshaping societies and economies. Whether they are proved right or wrong, their arguments should prompt a much-needed reflection on widely held assumptions about future developments.

Marco Lombardi, Marianna Riggi, Eliana Viviano, 22 December 2020

The Phillips curve – the relationship between economic activity and inflation – has become elusive since the 1980s in most advanced economies, including the euro area. This column argues that an important driver of this phenomenon is the erosion of workers’ bargaining power, which induced firms to react to business cycle fluctuations by adjusting the number of workers rather than hours worked per employee.

Ignazio Angeloni, 03 December 2020

Thiess Buettner, Boryana Madzharova, 27 October 2020

Facing the economic consequences of the Covid-19 pandemic, governments all over the world are considering providing a fiscal stimulus. A potentially powerful instrument to do so is a broad-based consumption tax such as VAT. This column argues that changes in VAT may have some effect in stimulating spending on certain consumer durable goods such as household appliances. However, these effects may be heterogenous across different product types and the timing and perceived credibility of the announcements are also important factors for policymakers to consider.

Paweł Baranowski, Wirginia Doryń, Tomasz Łyziak, Ewa Stanisławska, 22 October 2020

To achieve macroeconomic stabilisation, central banks attempt to manage the expectations of the private sector. Decisions on short-term interest rates and communication can both impact expectations, but communication is especially important under the effective lower bound, when the room to move interest rates down is limited. Using data from Poland, this column shows that while monetary policy shapes the expectations of the private sector through both communication and interest rate decisions, the impact can differ depending on the variable forecasted and on the forecasting horizon.

Luis Garicano, Jesus Saa-Requejo, Tano Santos, 06 October 2020

One lasting effect of the Global Crisis and the Covid-19 crisis will be a large increase in general government debt worldwide. This may lead to a scenario of ‘fiscal dominance’, in which expansionary fiscal policies are combined with accommodating monetary policies to alleviate the debt burden. This column argues that such a situation would put central banks in a precarious position of having to contain inflationary pressures and maintain financial stability. Expanding the independence of central banks and reaffirming the commitment to fighting inflation may be necessary in case of an unexpected inflation shock. 

Marco Del Negro, Michele Lenza, Giorgio Primiceri, Andrea Tambalotti, 18 September 2020

The analysis of inflation dynamics and their possible changes over time is a key input in the design of monetary policy, particularly in the context of the strategy reviews recently undertaken by the Federal Reserve and currently under way at the ECB and other central banks. This column studies the causes of the stability of US inflation over the business cycle since the 1990s. It concludes that the stability is mainly due to a reduced sensitivity of firms’ pricing decisions to their cost pressures. Ignoring this observation could impair the ability of monetary policy to steer inflation toward its objective.

Ignazio Angeloni, 14 September 2020

The long-awaited outcome of the Federal Reserve’s monetary strategy review is finally out. This column argues that while the ‘Powell doctrine’ responds to a genuine need to address issues in the Fed’s policy framework, it also introduces complexities in the interpretation and implementation of monetary policy which are likely to become more apparent over time. The hurdles involved do not have easy solutions, and other central banks pondering their own monetary policy framework are well advised to take heed.

Itamar Drechsler, Alexi Savov, Philipp Schnabl, 11 September 2020

In a recent speech in Jackson Hole, Fed Chair Jay Powell laid out the Fed’s new monetary policy framework.  Under this framework, the Fed will allow inflation to run above its 2% target in order to boost employment following a downturn.  The new framework marks a departure from the perceived wisdom of the 1970s’ Great Inflation.  Under this perceived wisdom, the Fed must respond aggressively to rising inflation or risk losing its credibility and letting inflation spiral out of control.  New research on the Great Inflation challenges this perceived wisdom and offers a new explanation for what really drives inflation.  Instead of Fed credibility, this explanation puts the financial system and how it transmits monetary policy front and centre.  In doing so, it reconciles the 1970s with the current environment and provides a foundation for understanding why the Fed’s new framework is unlikely to trigger runaway inflation.

Eric Lonergan, Megan Greene, 03 September 2020

The low interest rate environment since the Global Financial Crisis has led economists and analysts to suggest that major central banks have run out of monetary policy tools with which to face major downturns, including the Covid-19 crisis. This column argues that a dual interest rate approach could help to eliminate the effective lower bound and given central banks infinite fire power. By employing dual interest rates, central banks can go beyond targeting short-term interest rates and providing emergency liquidity to provide a stimulus across the economy. As political support for fiscal stimulus in the face of the Covid-19 crisis wanes, central banks can and should step in with overwhelming force.

Gregor Boehl, Gavin Goy, Felix Strobel, 30 August 2020

Despite their pivotal role, the macroeconomic effects of large-scale asset purchases, known as quantitative easing, remain open to debate. This column provides insights from a structural investigation of the macroeconomic effects of the Federal Reserve’s quantitative easing programme during the global financial crisis. In line with the general consensus, the results suggest that asset purchases substantially eased borrowing conditions and facilitated new investment. The rise in investment led to an increase in the productive capacity which, in turn, lowered firms’ marginal cost. These supply-side effects dominated demand-side effects in determining the response of inflation, leading to a mild disinflationary effect.

Philippe Andrade, Erwan Gautier, Eric Mengus, 04 August 2020

According to macroeconomic theory, managing inflation expectations is crucial for stabilising the economy. This is particularly true in times of crisis, when the nominal interest rate hits its lower bound. This column provides new evidence from France on how the inflation expectation channel operates in terms of consumer spending. The results suggest that households make consumption decisions based on the broad inflation regime that they expect, rather than with regards to the precise inflation forecast.

Maritta Paloviita, Markus Haavio, Pirkka Jalasjoki, Juha Kilponen, Ilona Vänni, 28 July 2020

The introductory statements made by the ECB are some of the most important sources of insight into the central banks’ policy goals. This column presents a textual analysis which seeks to measure the tone of the statements, with the aim of estimating the Governing Council's ‘loss function’. The results suggest that the ECB has been either more averse to inflation above the 2% ceiling, or that the de facto inflation target has been considerably below this threshold. The results also suggest that an inflation aim of 2%, combined with asymmetry, is a plausible specification of the ECB's wider preferences.

Xavier Jaravel, Martin O'Connell, 26 July 2020

The coronavirus pandemic has resulted in large shocks to both demand and supply, which conceivably could result in deflation, disinflation, or higher inflation. This column summarises findings, based on real-time scanner data in UK, on inflation among fast-moving consumer goods during the pandemic. It shows that at the beginning of lockdown there was a sharp upturn in inflation and a significant fall in product variety.

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