Frederic S. Mishkin on Inflation Dynamics
Frederic S. Mishkin on Inflation Dynamics. A must-read article.
The most important development in monetary economics that I have witnessed over my now-long career has been the recognition that expectations are central to our understanding of the behavior of the aggregate economy. Theory tells us that inflation expectations must be a key driving force behind inflation. This dependence has long been implicit in traditional Phillips-curve analysis, but expectations--now in explicit form--are also a central feature of the increasingly popular New Keynesian Phillips curves, in which current-period inflation is a function of expectations of next period’s inflation and resource utilization. Therefore, a natural first place to look for explanations of changing inflation dynamics is a possible change in the expectations-formation process.
And, the following part actually reminds me of BOJ.
These stylized facts--that inflation has become less persistent and now responds less to aggregate demand and supply shocks--can lead to inappropriate policy advice. If we take these facts to be structural and attributable to factors other than monetary policy, we might interpret them as suggesting that the Federal Reserve could respond less to shocks and yet be confident that inflation would remain at a low level. In addition, the smaller coefficient on unemployment gaps in traditional Phillips-curve models, which seems to imply that the sacrifice ratio has gone up, might lead us to think that reducing inflation is very costly because it requires long periods of high unemployment. As a result, policymakers might decide that such an attempt would not be worthwhile and so would be less likely to try to reduce inflation if it were undesirably high. If used in model simulation exercises, the flatter Phillips curve might also suggest that getting inflation down to a particular desired level could take an inordinately long time.
- Glen Weyl: Price Theory and Market Design Fall 2013(2015.12.19)
- Inputs in the Production of Early Childhood Human Capital: Evidence from Head Start(2014.11.03)
- Great Teachers: How to Raise Student Learning in Latin America and the Caribbean(2014.09.17)
- On Piketty(2014.05.29)