Patterns of large inflationary episodes
In this paper, Blanco et al. look at the patterns that characterize the episodes of large inflation surges by conducting an event time study using data on short- and long-run inflation expectations from surveys of professional forecasters and other macroeconomic data for the period from 1990 to 2019 for 55 countries (both developed and developing economies). The authors document four key findings:
- Inflation surges tend to be persistent, with the duration of disinflation exceeding that of the initial inflation increase.
- Surges are initially unexpected but followed by a gradual catch-up of average short-term expectations with realized inflation.
- Long-term inflation expectations tend to exhibit increases that persist throughout disinflation.
- Policy responses are characterized by hikes in nominal interest rates but no tightening of real rates or fiscal balances. The evidence suggests that episodes of large and persistent inflation tend to occur when the government chooses not to tighten monetary or fiscal policies.
The paper’s findings have implications for designing monetary and fiscal policies to credibly lead to fast and durable disinflation, especially in the context of the recent U.S. inflation surge.
The Dynamics of Large Inflation Surges
Authors: Andrés Blanco, Pablo Ottonello, Tereza Ranosova
From: Federal Reserve of Atlanta, University of Michigan
Heterogeneous agents and inflation dynamics
In this paper, Kaplan et al. extend the Fiscal Theory of the Price Level models to include heterogeneous agents and incomplete financial markets. Their theoretical analysis focuses on two scenarios:
- One where the government runs positive primary surpluses and r > g: changes in fiscal policy lead to movements in the real interest rate because such a change alters the overall demand for savings among households. For a given setting of monetary policy, these different real rate dynamics imply different paths of inflation.
- One where the government runs a constant primary deficit and r < g: in this case and for lower levels of deficits, there are generically two steady-state equilibria. A low inflation steady state where there is a unique initial price level and subsequent path of inflation and real rates leading to that steady-state. A high-inflation steady state where there is a continuum of initial price levels “that support paths of inflation and real rates leading to that steady-state.”
We conduct quantitative experiments to illustrate how redistribution and precautionary saving amplify price level increases in response to fiscal helicopter drops, deficit expansions, and loose monetary policy. We show that rising primary deficits can account for a decline in the long-run real interest rate, leading to higher inflation for any given monetary policy. Our work highlights the role of household heterogeneity and market incompleteness in determining inflation.
Price Level and Inflation Dynamics in Heterogeneous Agent Economies
Authors: Greg Kaplan, Georgios Nikolakoudis, Giovanni L. Violante
From: University of Chicago, Princeton University
