We study the global inflation surge during the pandemic recovery and the implications for aggregate and sectoral Phillips curves. We provide evidence that Phillips curves shifted up and steepened across advanced economies, and that differences in the inflation response across sectors imply the relative price of goods has been pro-cyclical this time around rather than a-cyclical as during previous cycles. We show analytically that these three features emerge endogenously in a two-sector new-Keynesian model when we introduce unbalanced recoveries that run against a supply constraint in the goods sector. A calibrated exercise shows that the resulting changes to the output-inflation relation are quantitatively important and improve the model's ability to replicate the inflation surge during this period.
We explore two issues triggered by the crisis. First, in most advanced countries, output remains far below the pre-recession trend, suggesting hysteresis. Second, while inflation has decreased, it has decreased less than anticipated, suggesting a breakdown of the relation between inflation and activity. To examine the first, we look at 122 recessions over the past 50 years in 23 countries. We find that a high proportion of them have been followed by lower output or even lower growth. To examine the second, we estimate a Phillips curve relation over the past 50 years for 20 countries. We find that the effect of unemployment on inflation, for given expected inflation, decreased until the early 1990s, but has remained roughly stable since then. We draw implications of our findings for monetary policy.
This paper analyzes whether structural changes in the aftermath of the pandemic have steepened the Phillips curves in advanced economies, reversing the flattening observed in recent decades and reducing the sacrifice ratio associated with disinflation. Particularly, analysis of granular price quote data from the UK indicates that increased digitalization may have raised price flexibility, while de-globalization may have made inflation more responsive to domestic economic conditions again. Using sectoral data from 24 advanced economies in Europe, higher digitalization and lower trade intensity are shown to be associated with steeper Phillips curves. Post-pandemic Phillips curve estimates indicate some steepening in the UK, Spain, Italy and the euro area as a whole, but at magnitudes that are too small to explain the entire surge in inflation in 2021–22, suggesting an important role for outward shifts in the Phillips curve.
Inflation is regarded by the many as a menace that damages business and can only make life worse for households. Keeping it low depends critically on ensuring that firms and workers expect it to be low. So expectations of inflation are a key influence on national economic welfare. This collection pulls together a galaxy of world experts (including Roy Batchelor, Richard Curtin and Staffan Linden) on inflation expectations to debate different aspects of the issues involved. The main focus of the volume is on likely inflation developments. A number of factors have led practitioners and academic observers of monetary policy to place increasing emphasis recently on inflation expectations. One is the spread of inflation targeting, invented in New Zealand over 15 years ago, but now encompassing many important economies including Brazil, Canada, Israel and Great Britain. Even more significantly, the European Central Bank, the Bank of Japan and the United States Federal Bank are the leading members of another group of monetary institutions all considering or implementing moves in the same direction. A second is the large reduction in actual inflation that has been observed in most countries over the past decade or so. These considerations underscore the critical – and largely underrecognized - importance of inflation expectations. They emphasize the importance of the issues, and the great need for a volume that offers a clear, systematic treatment of them. This book, under the steely editorship of Peter Sinclair, should prove very important for policy makers and monetary economists alike.
The COVID-19 pandemic has led to a severe global recession with differential impacts within and across countries. This paper examines the possible persistent effects (scarring) of the pandemic on the economy and the channels through which they may occur. History suggests that deep recessions often leave long-lived scars, particularly to productivity. Importantly, financial instabilities—typically associated with worse scarring—have been largely avoided in the current crisis so far. While medium-term output losses are anticipated to be lower than after the global financial crisis, they are still expected to be substantial. The degree of expected scarring varies across countries, depending on the structure of economies and the size of the policy response. Emerging market and developing economies are expected to suffer more scarring than advanced economies.
Traditionally, economic growth and business cycles have been treated independently. However, the dependence of GDP levels on its history of shocks, what economists refer to as “hysteresis,” argues for unifying the analysis of growth and cycles. In this paper, we review the recent empirical and theoretical literature that motivate this paradigm shift. The renewed interest in hysteresis has been sparked by the persistence of the Global Financial Crisis and fears of a slow recovery from the Covid-19 crisis. The findings of the recent literature have far-reaching conceptual and policy implications. In recessions, monetary and fiscal policies need to be more active to avoid the permanent scars of a downturn. And in good times, running a high-pressure economy could have permanent positive effects.
Central banking has a long and colourful history from which important lessons can be drawn. This book reviews the policy objectives and financial operations of 25 central banks established before 1800 to show that many of today's central banking controversies date as far back as this time.
In 2021-22, inflation in Europe soared to multidecade highs, consistently exceeding policymakers’ forecasts and surprising with its wide cross-country dispersion. This paper analyzes the key drivers of the inflation surge in Europe and its variation across countries. The analysis highlights significant differences in Phillips curve parameters across Europe’s economies. Inflation is more sensitive to domestic slack and external price pressures in emerging European economies compared to their advanced counterparts, which contributed to a greater passthrough of global commodity price shocks into domestic prices, and, consequently, to larger increases in inflation rates. Across Europe, inflation also appears to have become increasingly backward looking and more sensitive to commodity price shocks since the onset of the COVID-19 pandemic. This finding helps explain why conventional (Phillips curve) inflation models consistently underpredicted the 2021-2022 inflation surge, although it remains too early to conclude there has been a structural break in the inflation process.
The global economy has experienced many challenges in recent times, particularly in the shadow of the COVID-19 pandemic, such as dwindling demand, supply chain disruptions, declining growth rates, further pandemic waves, and increasing poverty and inequality to name but a few. Four years after the pandemic, economies are still struggling to achieve sustainable economic growth and development. While much has been written about the impact of COVID-19 on various sectors and economies, this is the first book to underscore the post-COVID global uncertainties that are still occurring on the world stage and further, to present the recent challenges such as geo-political tensions, war, economic disturbances, climate change, the energy crisis in Europe, recession in developed economies and its effect on developing and least developed economies. The book starts by setting the grounds for further discussion of the present challenges as well as future implications. In addition to examining the immediate issues which occurred with the onset of the pandemic, it explores these from the perspective of developed, developing, and least developed countries. The wide-ranging topics covered by the book include the ongoing Russia-Ukraine War, China’s increasing economic dominance in neighbouring countries, the economic collapse of Sri Lanka and Pakistan, the factors that led to the technology layoffs and the future of global employees and economies. The book goes beyond looking at sector-specific factors and broadly outlines country-specific instabilities, policy choices and the way forward. The book will be of interest to students of macroeconomics, development and international economics, and international relations as well as researchers and policymakers.
A major, new, and comprehensive look at six decades of macroeconomic policies across the region What went wrong with the economic development of Latin America over the past half-century? Along with periods of poor economic performance, the region’s countries have been plagued by a wide variety of economic crises. This major new work brings together dozens of leading economists to explore the economic performance of the ten largest countries in South America and of Mexico. Together they advance the fundamental hypothesis that, despite different manifestations, these crises all have been the result of poorly designed or poorly implemented fiscal and monetary policies. Each country is treated in its own section of the book, with a lead chapter presenting a comprehensive database of the country’s fiscal, monetary, and economic data from 1960 to 2017. The chapters are drawn from one-day academic conferences—hosted in all but one case, in the focus country—with participants including noted economists and former leading policy makers. Cowritten with Nobel Prize winner Thomas J. Sargent, the editors’ introduction provides a conceptual framework for analyzing fiscal and monetary policy in countries around the world, particularly those less developed. A final chapter draws conclusions and suggests directions for further research. A vital resource for advanced undergraduate and graduate students of economics and for economic researchers and policy makers, A Monetary and Fiscal History of Latin America, 1960–2017 goes further than any book in stressing both the singularities and the similarities of the economic histories of Latin America’s largest countries. Contributors: Mark Aguiar, Princeton U; Fernando Alvarez, U of Chicago; Manuel Amador, U of Minnesota; Joao Ayres, Inter-American Development Bank; Saki Bigio, UCLA; Luigi Bocola, Stanford U; Francisco J. Buera, Washington U, St. Louis; Guillermo Calvo, Columbia U; Rodrigo Caputo, U of Santiago; Roberto Chang, Rutgers U; Carlos Javier Charotti, Central Bank of Paraguay; Simón Cueva, TNK Economics; Julián P. Díaz, Loyola U Chicago; Sebastian Edwards, UCLA; Carlos Esquivel, Rutgers U; Eduardo Fernández Arias, Peking U; Carlos Fernández Valdovinos (former Central Bank of Paraguay); Arturo José Galindo, Banco de la República, Colombia; Márcio Garcia, PUC-Rio; Felipe González Soley, U of Southampton; Diogo Guillen, PUC-Rio; Lars Peter Hansen, U of Chicago; Patrick Kehoe, Stanford U; Carlos Gustavo Machicado Salas, Bolivian Catholic U; Joaquín Marandino, U Torcuato Di Tella; Alberto Martin, U Pompeu Fabra; Cesar Martinelli, George Mason U; Felipe Meza, Instituto Tecnológico Autónomo de México; Pablo Andrés Neumeyer, U Torcuato Di Tella; Gabriel Oddone, U de la República; Daniel Osorio, Banco de la República; José Peres Cajías, U of Barcelona; David Perez-Reyna, U de los Andes; Fabrizio Perri, Minneapolis Fed; Andrew Powell, Inter-American Development Bank; Diego Restuccia, U of Toronto; Diego Saravia, U de los Andes; Thomas J. Sargent, New York U; José A. Scheinkman, Columbia U; Teresa Ter-Minassian (formerly IMF); Marco Vega, Pontificia U Católica del Perú; Carlos Végh, Johns Hopkins U; François R. Velde, Chicago Fed; Alejandro Werner, IMF.
