low inflation — lessons from the past, lessons for …...2017/09/21 · low inflation—lessons...
Post on 25-Aug-2020
2 Views
Preview:
TRANSCRIPT
Low inflation —
Lessons from the past,
Lessons for the future?
Stephanie Schmitt-Grohe
Columbia University
Policy Panel, September 21, 2017
European Central Bank
Frankfurt am Main
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
Jobless Recovery with Liquidity Trap
United States, 1929-1938
1930 1932 1934 1936 193870
75
80
85
90
95
100L
eve
l, 1
92
9=
10
0
U.S. Real GDP per Capita (1929=100)
1930 1932 1934 1936 193830
32
34
36
38
40U.S. Civilian Employment−to−Population Ratio
pe
rce
nt
1930 1932 1934 1936 19380
1
2
3
4
5
pe
rce
nt
Yields On Short−Term United States Securities
1930 1932 1934 1936 193870
80
90
100
110U.S. CPI Index (1929=100)
19
29
=1
00
Vertical lines: NBER recession dates, 1929Q2, 1933Q1, 1937Q1, and 1938Q2.
2
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
Nominal Wage Rate and Consumer Prices,
United States 1923:1-1935:7
1924 1926 1928 1930 1932 1934
−0.3
−0.25
−0.2
−0.15
−0.1
−0.05
0
0.05
Year
1929:8
=0
log(Nominal Wage Index)
log(CPI Index)
Source: Uribe and Schmitt-Grohe, 2017, Figure 9.8. Solid line: natural logarithm of an index ofmanufacturing money wage rates. Broken line: logarithm of the consumer price index. Verticallines: NBER recession dates.
3
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
Jobless Growth Recovery with Liquidity Trap
Japan, 1989-2001
1990 1992 1994 1996 1998 20000
2
4
6
8
10Interest Rate, call rate
Perc
ent P
er
Year
1990 1992 1994 1996 1998 2000−2
−1
0
1
2
3Inflation, GDP deflator, yoy
Perc
ent P
er
Year
1990 1992 1994 1996 1998 2000
−2
0
2
4
6Real Per Capita GDP Growth, yoy
Perc
ent P
er
Year
1990 1992 1994 1996 1998 200059
60
61
62
63Employment−to−Population Ratio
Perc
ent
Vertical lines: Cabinet Office Recession dates, 1991Q1, 1993Q4, 1997Q2, 1999Q1.
4
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
Jobless Growth Recovery with Liquidity Trap
United States, 2005Q1-2017Q2
2006 2008 2010 2012 2014 2016−6
−4
−2
0
2p
erc
en
t p
er
ye
ar
Real Per Capita GDP Growth, yoy
2006 2008 2010 2012 2014 201658
59
60
61
62
63
64Employment−Population Ratio
pe
rce
nt
2006 2008 2010 2012 2014 20160
1
2
3
4
5
6
pe
rce
nt
Federal Funds Rate
2006 2008 2010 2012 2014 20160
0.5
1
1.5
2
2.5
3
3.5Inflation, GDP deflator, yoy
pe
rce
nt
pe
r ye
ar
Vertical lines: NBER recession dates, 2007Q4 and 2009Q2
5
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
−0.2 0 0.20
10
20
1997
−0.2 0 0.20
10
20
1998
−0.2 0 0.20
10
20
1999
−0.2 0 0.20
10
20
2000
−0.2 0 0.20
10
20
2001
−0.2 0 0.20
10
20
2002
−0.2 0 0.20
10
20
2003
−0.2 0 0.20
10
20
2004
−0.2 0 0.20
10
20
2005
−0.2 0 0.20
10
20
2006
−0.2 0 0.20
10
20
2007
−0.2 0 0.20
10
20
2008
−0.2 0 0.20
10
20
2009
−0.2 0 0.20
10
20
2010
−0.2 0 0.20
10
20
2011
−0.2 0 0.20
10
20
2012
−0.2 0 0.20
10
20
2013
−0.2 0 0.20
10
20
2014
−0.2 0 0.20
10
20
2015
−0.2 0 0.20
10
20
2016
Source: Jo, Schmitt-Grohe, and Uribe (2017).
6
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
Real Wage Growth Held up Relatively Well During the 2008 Recession
Source: Daly, Hobijn, and Lucking, 2012.
• real wages grew by 1.1 percent per year on average between 2008 and 2011.
7
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
Jobless Growth Recovery with Liquidity Trap
Euro Area, 2005-2017
2006 2008 2010 2012 2014 2016−2
0
2
4
6Interest Rate, Eonia
Pe
rce
nt
Pe
r Y
ea
r
2006 2008 2010 2012 2014 2016−1
0
1
2
3
4Inflation Rate, HICP
Pe
rce
nt
Pe
r Y
ea
r
2005 2010 2015−6
−4
−2
0
2
4P
erc
en
t P
er
Ye
ar
Real Per Capita GDP Growth
2006 2008 2010 2012 2014 201660
65
70
75
Pe
rce
nt
Employment−Population Ratio, Male
Male
All
Vertical lines: CEPR business cycle dates, 2008Q1, 2009Q2, 2011Q3, 2013Q1.
8
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
Conventional View of Liquidity Trap:
Inflationary expectations are well anchored (i.e., inflation is expected
to return to some target, say 2%) and liquidity trap is the consequence
of negative shocks to the natural rate of interest.
Exercise: Assume that the natural rate falls from its steady-state
value of 4 percent per year to -2 percent per year for 10 quarters
and then returns to 4 percent forever.
Result in a model with nominal rigidities: predicted recovery is
job creating, inflation is monotonically increasing during the recovery,
and output growth is above average during the recovery. All three
predictions are counterfactual. (see for example Schmitt-Grohe and
Uribe, 2017; Del Negro et al, or Curdia et al. 2015).
9
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
A Contraction With A Job-Creating Recovery:
Response to a Persistent Decline In The Natural Rate
0 5 10 15 20−15
−10
−5
0
5Inflation
% a
nn
ua
l
t
0 5 10 15 2093
94
95
96
97
98
99
100Employment Rate
%
t
0 5 10 15 200
1
2
3
4
5
6
7Interest Rate
% a
nn
ua
l
t
0 5 10 15 20−20
−15
−10
−5
0
5Output Growth Rate
% a
nn
ua
l
t
Source: Schmitt-Grohe and Uribe, 2017.
10
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
Curdia (2015) shows that conventional view requires that economy is continuouslysurprised by yet another negative natural rate shock:
Source: Curdia, FRBSF EL 2015.
11
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
ECB revisions to the core HICP inflation path:
12
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
Alternative View: A Downward Revisionin Inflation Expectations.
Agents stop believing that the central bank will be able to bring the
economy back to the inflation target, say 2%. Instead agents assign
positive probability to the event that inflation will settle at some
πL <2%.
“Mr. Draghi and his peers are afraid that consumers and investors will increasingly
see low inflation as the new normal, creating a self-fulfilling prophecy.” NYT, page
B7, November 22, 2014.
Exercise: Assume that in period 0 agents start believing that in the
long run inflation is below target with probability one.
Result: Recovery is jobless, inflation is monotonically declining
during the recovery, and output growth is below average during the
recovery.
13
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
Effects of A Downward Revision in Inflationary Expectations
0 10 20 30 40 50−4
−3
−2
−1
0
1
2Inflation
% a
nnual
t
0 10 20 30 40 5094
95
96
97
98
99
100Employment Rate
%
t
0 10 20 30 40 500
1
2
3
4
5
6Interest Rate
% a
nnual
t
0 10 20 30 40 500.4
0.6
0.8
1
1.2
1.4
1.6
1.8Output Growth Rate
% a
nnual
t
Source: Schmitt-Grohe and Uribe, 2017.
14
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
Any evidence in support of downward revisions of long-run
inflation expectations in the U.S.?
Source: FRB Minneapolis, https://www.minneapolisfed.org/banking/mpd
15
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
Conclusion
• Past recoveries from low-inflation, deep recessions have been
jobless and were associated with zero nominal rates.
• During the recovery inflation was below target despite zero nominal
rates.
• Standard theoretical models predict that when the liquidity trap
is the consequence of negative shocks to the natural rate, then
recovery is associated with rising inflation and job creation.
• At the same time such models predict that if the liquidity trap
is the consequence of a downward revision to long-run inflation
expectations, then recovery is associated with low inflation and
jobless.
16
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
Extras
17
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
Unemployment and Growth in Nominal Hourly Wages
Evidence from the Eurozone
Unemployment Rate Wage Growth
2008Q1 2011Q2W2011Q2
W2008Q1
Country (in percent) (in percent) (in percent)
Bulgaria 6.1 11.3 43.3Cyprus 3.8 6.9 10.7Estonia 4.1 12.8 2.5Greece 7.8 16.7 -2.3Ireland 4.9 14.3 0.5Italy 6.4 8.2 10.0Lithuania 4.1 15.6 -5.1Latvia 6.1 16.2 -0.6Portugal 8.3 12.5 1.91Spain 9.2 20.8 8.0Slovenia 4.7 7.9 12.5Slovakia 10.2 13.3 13.4
Source: Schmitt-Grohe and Uribe (2017).
18
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
Did Real Wage Growth Exceed TFP Growth in the Recovery
in the U.S.?
Daly et al. report that real wages grew by 1.1 percent per year on
average between 2008 and 2011.
Fernald, FRBSF Productivity Data Base, report that adjusted TFP
grew by 0.75 percent per year on average between 2008 and 2011.
Hence real hourly wage growth exceeded TFP growth by 0.35
percent per year over the period 2008-2011.
19
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
U.S. 10-Year Expected Inflation: 2005Q1-2017Q3
2006 2008 2010 2012 2014 20161
1.5
2
2.5
3p
erc
en
t
Source: Federal Reserve Bank of Cleveland.
20
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
Micro Evidence On Downward Nominal Wage Rigidity From
Other Developed Countries
• Canada: Fortin (1996).
• Japan: Kuroda and Yamamoto (2003).
• Switzerland: Fehr and Goette (2005).
• Industry-Level Data: Holden and Wulfsberg (2008), 19 OECD
countries from 1973 to 1999.
21
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
Evidence From Informal Labor Markets
• Kaur (2012) examines the behavior of nominal wages, employment,
and rainfall in casual daily agricultural labor markets in rural India
(500 districts from 1956 to 2008).
• Finds asymmetric nominal wage adjustment:
— Wt increases in response to positive rainfall shocks
— Wt fails to fall, labor rationing, and unemployment are observed
in response to negative rain shocks.
• Inflation (uncorrelated with local rain shocks) tends to moderate
rationing and unemployment during negative rain shocks, suggesting
downward rigidity in nominal rather than real wages.
22
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
Evidence From Emerging Countries
• Argentina: pegged the peso at a 1-to-1 rate with the dollar
between 1991 and 2001.
• Starting in 1998, the economy was buffeted by a number of large
negative shocks (weak commodity prices, large devaluation in Brazil,
large increase in country premium, etc.).
• Not surprisingly, between 1998 and 2001, unemployment rose
sharply.
• Nonetheless, nominal wages remained remarkably flat.
• This evidence suggests that nominal wages are downwardly rigid.
23
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
Argentina 1996-2006
1996 1998 2000 2002 2004 20060
1
2
3
4
Year
Pe
so
s p
er
U.S
. D
olla
r
Nominal Exchange Rate (Et)
1996 1998 2000 2002 2004 2006
6
12
Year
Nominal Wage (Wt)
Pe
so
s p
er
Ho
ur
1996 1998 2000 2002 2004 20060.4
0.6
0.8
1
1.2
1.4
Real Wage (Wt/E
t)
Year
Ind
ex 1
99
6=
1
1996 1998 2000 2002 2004 200620
25
30
35
40Unemployment Rate + Underemployment Rate
Pe
rce
nt
Year
Source: Schmitt-Grohe and Uribe, JPE forthcoming.
24
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
EPOP
Vs.
Unemployment
25
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
EPOP vs. Unemployment Rate
Take a look at the next slide. In Japan and Europe the employment-
to-population ratio (EPOP) and the unemployment rate both indicate
that labor market condition have not improved much since the
beginning of the recovery. Thus, one could use either labor market
indicator the make the point that the recoveries have been jobless.
However, in the United States, the unemployment rate suggests
steady improvement of labor conditions since 2010, whereas the the
EPOP ratio suggests no such improvement. Why?
Because labor force participation rate declined by 2.5 percent during
the recovery in the U.S..
26
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
Is the observed decline in the labor force participation ratio cyclical
or not (i.e., due to demographic factors)?
Erceg and Levin (2013) cite several studies and also present original
evidence that it is mainly cyclical.
Erceg and Levin also show that the decline in LFPR was largest for
young people, 16 to 24 years of age, 2nd largest for 25 to 54 years
of age. So this is not old people retiring because of age or taking
early retirement because the job market looks bad.
27
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
Employment-to-Population Ratio versus Unemployment
Rate: USA, Japan, Euro Area
2005 2010 201558
60
62
64EPOP, USA
perc
ent
2005 2010 20154
6
8
10
perc
ent
Unemployment Rate, USA
1990 1995 200059
60
61
62
63EPOP, Japan
Perc
ent
1990 1995 20002
3
4
5Unemployment Rate, Japan
Perc
ent
2005 2010 2015
8
10
12
Perc
ent
Unemployment Rate, Europe
2005 2010 2015
69
70
71
72
73
EPOP, male, Europe
Perc
ent
28
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
U.S. Labor Force Participation
Source: Erceg and Levin (2013)
29
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
Source: Erceg and Levin (2013)
30
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
Other evidence in support of the claim that the U.S. recovery was
jobless: no recovery in involuntary part-time work
NYTimes, April 19, 2013
“It was a relief just to find something,” said Amie Crawford, 56,
of Chicago. After four months looking for a new job as an interior
designer, which she had been for 30 years before the recession, she
accepted a position as a part-time cashier at a quick-service health-
food cafe called Protein Bar.
She keeps asking for more hours, but her manager’s response is
always the same.
“He tells me, ‘I try to give you as many hours as I can, but everybody
wants as many hours as they can,’ ” Ms. Crawford said.
31
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
2002 2004 2006 2008 2010 2012 20143000
4000
5000
6000
7000
8000
9000
10000Involuntary Part−Time Workers: 2002:Jan to 2013:March, LNS12032197
Thousands, 16 y
ears
and o
ver
Year
Data Source: Bureau of Labor Statistics.
32
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
Actual and Expected CPI Inflation, Japan, 1989-2001
1990 1992 1994 1996 1998 2000−2
−1
0
1
2
3
4
5−year ahead Consensus Forecast
Actual CPI Inflation
Ex−post 5−year ahead CPI inflation
CPI Inflation, y/y
Year
Perc
ent P
er
Year
Data Sources. CPI: http://www.stat.go.jp/english/data/cpi/index.htm. Expected CPI Inflation
from April and October survey of Consensus Forecast.
33
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
Did Real Wage Growth Exceed TFP Growth in the Recovery?
Real Wage Growth relative to TFP Growth between 2008 and 2011
in the United States
Fernald, FRBSF Productivity Data Base: Average Annual TFP
Growth from 2008 to 2011 was 0.75 percent
Year 2009 2010 2011%∆TFP 3.32 -0.39 -0.69
Daly et al. report that real wages grew by 1.1 percent per year on
average between 2008 and 2011.
Hence real wage growth exceeded TFP growth by 0.35 percent per
year, for a total of 1.05 percent over the period 2008-2011.
34
Low inflation—Lessons from the past, Lessons for the future? Schmitt-Grohe
Source: Del Negro, Giannoni, and Schorfheide, 2013. “INFLATION IN THE GREAT RECESSIONAND NEW KEYNESIAN MODELS”
35
top related