Inflation and Activity - Two Explorations and Their Monetary Policy Implications

By Olivier J. Blanchard, Eugenio Cerutti, Lawrence H. Summers. Social Science Research Network, 2015

470 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/6958248b1d49863cd232c77a8ec393e30061cc15

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Citations in the corpus

What's Up with the Phillips Curve? (2020, unknown): “…is the large literature on the role of in ation expectations and their anchoring (e.g. Orphanides and Williams, 2005, Bernanke, 2007, Stock, 2011, Blanchard et al., 2015, Blanchard, 2016, Ball and Mazumder, 2019, Carvalho et al., 2019, Jorgensen and Lansing, 2019, and Barnichon and Mesters…”
Optimal Inflation and the Identification of the Phillips Curve (2019, background): “Those factors were a series of large cost shocks (increases in ut in (1)) brought about by oil supply disruption32, and the Federal Reserve’s inability, unwillingness33 or miscalculations34 in trying to 32Gordon (1977); Blinder (1982). 33DeLong (1997). 34Orphanides (2002).”
Three green financial policies to address climate risks (2021, background): “…change can direct the pattern of growth, but, at the same time, recessions can affect the long-run performance of the economy via hysteresis effects (Blanchard et al., 2015; Dosi et al., 2017) Second, the model matches cointegration relationships between output, energy demand and emissions.”
Gone with the Headwinds: Global Productivity (2017, background): “2 See also Blanchard, Cerutti, and Summers (2015).”
Should We Reject the Natural Rate Hypothesis (2018, background): “Since the mid 1990s, the coefficient measuring the effect of unemployment on inflation has become smaller and less precisely estimated over time (see for example Blanchard et al. 2015, and Miles et al 2017).”
A Model of the Fed's View on Inflation (2017, unknown): “18 Blanchard et al. (2015) using multi country data but not a model based approach conclude that several recessions of diﬀerent nature are followed by lower growth.”
Monetary Policy, the Financial Cycle and Ultralow Interest Rates (2016, background): “…develops between the pre- and post-recession output trends (Cerra and Saxena (2008), BCBS (2010), Ball (2014)).3 This evidence calls into question the validity of standard presumptions that cyclical fluctuations take place around a predetermined trend (Martin et al (2015), Blanchard et al (2015)).”
The pre-Great Recession slowdown in productivity (2015, background): “There is some evidence that deep recessions (financially related or otherwise) may cast “long shadows” (Fatas, 2000)—permanently reducing the level of GDP compared with its pre-recession trend (e.g., Cerra and Saxena, 2008, Martin and Wilson, 2013, and Blanchard et al. 2015).”
When more Flexibility Yields more Fragility: the Microfoundations of Keynesian Aggregate Unemployment (2017, unknown): “Doubts on the Phillips curve are cast by Solow (1990) and more recently by Blanchard et al. (2015). A much stronger empirical support goes to the wage curve, which relates real wages and unemployment rates (typically at local level): so, Blanchflower and Oswald (1994), in an extensive regional analy”