Search Results
Discussion Paper
High Unemployment and Disinflation in the Euro Area Periphery Countries
Economists often model inflation as dependent on inflation expectations and the level of economic slack, with changes in expectations or slack leading to changes in the inflation rate. The global slowdown and the subsequent sovereign debt crisis caused the greatest divergence in unemployment rates among euro area member countries since the monetary union was founded in 1999. The pronounced differences in economic performances of euro area countries since 2008 should have led to significant differences in price behavior. That turned out to be the case, with a strong correlation evident between ...
Journal Article
Successful vs. Failed Disinflations: An Event Study
The U.S. did not experience large decreases in production or employment during the disinflation of 2022-2024. To put this unusually costless disinflation in context, this article characterizes the behavior of economic variables from more than 100 disinflation episodes in OECD countries. We decompose these episodes into those that successfully reduced inflation over several years, those in which inflation substantially rebounded, and the most recent episodes of 2022-2024. Successful episodes show several differences in comparison to failed episodes, including lower real interest rates and ...
Speech
Bullard Discusses Disinflation, Rate Increases and Economic Resilience on CNBC
During an appearance on CNBC, St. Louis Fed President Jim Bullard discussed disinflation, the federal funds rate and the resilience of the U.S. economy. To help curb inflation, Bullard said his target federal funds rate would be 5 3/8%. The target range for the rate currently is 4.5% to 4.75%.“I think we can get disinflation with a strong labor market, but we'll have to be credible in our policy and we'll have to react to the data as it comes up,” Bullard said.Bullard said the U.S. economy might be more resilient than financial markets thought six to eight weeks ago, and he expects ...
Report
Zombie Credit and (Dis-)Inflation: Evidence from Europe
We show that “zombie credit”—cheap credit to impaired firms—has a disinflationary effect. By helping distressed firms to stay afloat, such credit creates excess production capacity, thereby putting downward pressure on product prices. Granular European data on inflation, firms, and banks confirm this mechanism. Industry-country pairs affected by a rise of zombie credit show lower firm entry and exit rates, markups, and product prices, as well as a misallocation of capital and labor, which results in lower productivity, investment, and value added. Without a rise in zombie credit, ...
Journal Article
The Last Mile
Headline inflation in the euro area declined rapidly to 2.9% in October 2023 from its peak of 10.6% one year earlier. The bulk of this large drop reflected the substantial decline in the contributions from energy and food inflation. Once these base effects reverse, continued disinflation relies critically on monetary policy succeeding in reducing underlying inflation in a steady and timely manner. The last mile is about this change in the disinflation process. Large uncertainty around the appropriate calibration and effective transmission of monetary policy, together with the risk of new ...
Working Paper
Price Dispersion and Inflation Persistence
Persistent responses of inflation to monetary policy shocks have been difficult to explain by existing models of the monetary transmission mechanism without embedding controversial intrinsic inertia of inflation. Our paper addresses this issue using a staggered price model with trend inflation, a smoothed-off kink in demand curves, and a fixed cost of production. In this model, inflation exhibits a persistent response to a policy shock even in the absence of its intrinsic inertia, because the kink causes a measure of price dispersion, which is intrinsically inertial, to become a key source of ...
Speech
Comments on “Managing Disinflations” by Stephen G. Cecchetti, Michael E. Feroli, Peter Hooper, Frederic S. Mishkin, and Kermit L. Schoenholtz with Matthew Luzzetti and Justin Weidner
In the time I have, I will comment on three aspects of the paper: the empirical estimation of the Phillips curve, the role of inflation expectations, and the lessons for policymakers operating in an uncertain environment. The views I present will be my own and not necessarily those of the Federal Reserve System or of my colleagues on the Federal Open Market Committee.
Working Paper
Effective Lower Bound Risk
Even when the policy rate is currently not constrained by its effective lower bound (ELB), the possibility that the policy rate will become constrained in the future lowers today's inflation by creating tail risk in future inflation and thus reducing expected inflation. In an empirically rich model calibrated to match key features of the U.S. economy, we find that the tail risk induced by the ELB causes inflation to undershoot the target rate of 2 percent by as much as 50 basis points at the economy's risky steady state. Our model suggests that achieving the inflation target may be more ...
How Does Productivity Affect Inflation, Jobs and Pay?
Why would growing productivity from generative AI potentially help push down inflation? An economist explains that and other potential effects of productivity growth.
Journal Article
Financial Stress May Do Relatively Little to Reduce Inflation
Financial stress has risen in the wake of recent bank failures. At the same time, the Federal Reserve has been tightening the stance of monetary policy to reduce elevated inflation. While both banking stress and tighter monetary policy can slow economic activity, historical evidence suggests that financial stress may be less effective in reducing inflation.