low inﬂation — lessons from the past, lessons for …...2017/09/21 · low inﬂation—lessons...

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


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


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



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


−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


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



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


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


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


Curdia (2015) shows that conventional view requires that economy is continuouslysurprised by yet another negative natural rate shock:

Source: Curdia, FRBSF EL 2015.

11


ECB revisions to the core HICP inflation path:

12


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


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


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


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


Extras

17


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


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


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


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


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


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


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


EPOP

Vs.

Unemployment

25


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


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


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


U.S. Labor Force Participation

Source: Erceg and Levin (2013)

29


Source: Erceg and Levin (2013)

30


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


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


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


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


Source: Del Negro, Giannoni, and Schorfheide, 2013. “INFLATION IN THE GREAT RECESSIONAND NEW KEYNESIAN MODELS”

35

low inﬂation — lessons from the past, lessons for …...2017/09/21 · low inﬂation—lessons...

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