Lowflation

Lowflation in the US

Is it the first time in US history? No. Is it a problem? It doesn’t seem to show up in the economy’s RGDP growth performance.

Lowflation: Then and Now
By: David Andolfatto – Federal Reserve Bank of St. Louis

There might also be a good explanation: Mahedy and Shapiro argue that the PCE consists of a) categories exhibiting a procyclical relationship which include housing, recreational services, food services, and some nondurable goods; and b) acyclical categories, which include health-care services, financial services, clothing, transportation, and some other smaller categories. It’s the latter category and in particular health-care services that are exerting downward pressure on the PCE index.
What’s Down with Inflation?
By: Tim Mahedy, Adam Shapiro – Federal Reserve bank of San Francisco

Lowflation in the Eurozone

Ever since 2013 Euro area inflation measures have remained significantly below the 2{5e7f07e14add20b2e04f4edb85a447d3cd8121fc27b809645e9fed603c22cc5c} target. “Were the situation to last for too long, this might call into question the commitment of the Governing Council to achieve price stability” and might prompt the ECB to lower its inflation target.

What would be wrong with lowering the inflation target
By: Philippe Andrade, Hervé Le Bihan, Julien Matheron – Banque de France

Need to re-evaluate “policy parameters”

Andrade and al. use a New Keynesian DSGE model subject to the ZLB to evaluate how changes in the steady-state interest rate affect the optimal inflation target. They find that for the US and the Euro area starting from pre-crisis values, a 1{5e7f07e14add20b2e04f4edb85a447d3cd8121fc27b809645e9fed603c22cc5c} decline in the natural rate should be accommodated by an increase in the optimal inflation target of about 0.9{5e7f07e14add20b2e04f4edb85a447d3cd8121fc27b809645e9fed603c22cc5c}.
The optimal inflation target and the natural rate of interest
Authors: Philippe Andrade, Jordi Galí, Hervé Le Bihan, Julien Matheron
From: Banque de France – Barcelona GSE