Inflation in the Great Recession and Gradual Recovery Robert G. - - PowerPoint PPT Presentation

▶
inflation in the great recession and gradual recovery
SMART_READER_LITE
LIVE PREVIEW

Inflation in the Great Recession and Gradual Recovery Robert G. - - PowerPoint PPT Presentation

Nov 24, 2022 280 likes •701 views

Inflation in the Great Recession and Gradual Recovery Robert G. King Boston University FRB Boston Conference October 2016 1 Inflation modeling circa 2007 Standard New Keynedian model in textbooks, policy models. Incorporated

slide-1
SLIDE 1

Inflation in the Great Recession and Gradual Recovery

Robert G. King Boston University

1 FRB Boston Conference October 2016

slide-2
SLIDE 2

Inflation modeling circa 2007

  • Standard “ New Keynedian” model in

textbooks, policy models.

  • Incorporated long-standing view that inflation

lagged real activity (Conference Board) and estimation of price-wage sectors

  • Incorporated view that optimizing price-

setting is forward-looking when there are adjustment frictions

2 FRB Boston Conference October 2016

slide-3
SLIDE 3

2007 Specification

  • Rationalized by exogenous adjustment
  • pportunities (Calvo) or quadratic adjustment

costs (Rotemberg)

  • Lurking in background: changing frequency of

price adjustment

1 1 t t t t t t

fE l cs gx   

 

   

3 FRB Boston Conference October 2016

slide-4
SLIDE 4

Questions on specification circa 2007

  • Why is l not zero?
  • How big is f relative to l?
  • Do these sum to 1 or close to it?
  • How to measure expectations? Surveys or RE

approaches?

  • What x’s are important?
  • If x is real and f+l=1, then what determines long-run

inflation? (monetary policy, but how?)

4 FRB Boston Conference October 2016

slide-5
SLIDE 5

2007 Specification: strategies on “s”

  • Strategy #1: s is marginal cost or desired price

measure, in which wages and productivity enter.

  • Inflation equation is one part of wage-price block, so

additional modeling required.

  • Employed in many DSGE models (e.g., Smets-Wouters) and

larger central bank policy models (e.g., FRB-US)

  • Strategy #2: s is a macro slack measure skipping

process of wage determination

  • Focus on finding best slack measure (e.g., output gap

versus unemployment)

  • Develop model more immediately useful for linking

inflation and real activity

5 FRB Boston Conference October 2016

slide-6
SLIDE 6

Historical experience and research since 2007 and topics of project

  • Topic 1: Recent accounts of inflation since 2008 using

diverse methods (Watson, Y ellen) use a very different framework, which emphasizes long-run inflation expectations: a “trend inflation view” that views expectations as anchored during 2008-16. How satisfactory is this account and how different would it be if shorter term expectations were employed?

  • Approach: Use survey expectations measures as in

Roberts (1995) and more recent work by Fuhrer (2011, 2012, … ) and calculation in “off the shelf” models.

  • M otivation: period since 2008 historically unusual and

RE methods might be misleading

6 FRB Boston Conference October 2016

slide-7
SLIDE 7

Topics (continued)

  • Topic 2: Since 2007, there has been a large research

program started by Bils and Klenow (2004) that measures size and frequency of micro price adjustments. How does this work inform our understanding of the inflation process

  • ver 2008-2016?
  • Approach: constrained by access to micro data, use

summary measures from Klenow and Kryvstov (2008) and Nakamura and Steinsson (2008) to frame issue. Use summary data from Berger and Vavra (2015) to explore 2008-2011.

  • M otivations: Does evidence resolve historical puzzles

identified in first topic? What are implications for modeling? What types of public access series would be usefully produced?

7 FRB Boston Conference October 2016

slide-8
SLIDE 8

Topics (cont’d)

  • Topic 3 (not included, as not settled): M any

modelers circa 2007 followed Gali and Gertler (1999) and Sbordone (2002) in using real unit labor cost (labor’s share) within strategy #1

  • Approach: rework using alternative measures of

cost and productivity

  • M otivation: Behavior of labor’s share since 2000

meant that this RULC approach has gone badly

  • ff target, as King and Watson (2012) stress.

8 FRB Boston Conference October 2016

slide-9
SLIDE 9

M ore general inflation model

  • Add long-run inflation expectation t (expectation

about trend inflation) .

  • Some cases (x real)

– Accelerationist model (f=m=0, l=1) – Trend inflation model (f=0, m+l=1) – Standard NK model 2007 (m=0, f+l close to 1)

  • Purely forward-looking l=0, f close to 1
  • Representative (Fuhrer-M oore f=l=1/ 2)

9

1 1 t t t t t t t

m fE l cs gx    

 

    

FRB Boston Conference October 2016

slide-10
SLIDE 10

M aking issues concrete: looking back at FOM C in June 2009

  • Economy starting to turn around.
  • Unemployment close to 10% and forecasted to remain

high for an extended period

  • Inflation had fallen dramatically in late 2008 and early

2009 (by more than was understood at the time).

  • What would future inflation look like? Concern that a

deflationary spiral might occur

  • Battery of models to illustrate range of possible
  • utcomes:

– Simple accelerationist-style OLS estimate; – FRBUS-based forecast with FFR at ZLB through end of 2012 – DSGE model featuring difference between types of goods

10 FRB Boston Conference October 2016

slide-11
SLIDE 11

An estimate and implicit threat

  • Accelerationist slope

estimated by 20 year rolling regressions

11

  • Annual inflation with

actual unemployment

(June to June, from 2 percent in 2008 and 2009H1)

2008 2009 2010 2011 2012 2013 2014 2015 2016

  • 2
  • 1.5
  • 1
  • 0.5

0.5 1 1.5 2

Simulated inflation under the accelerationist model

FRB Boston Conference October 2016

slide-12
SLIDE 12

Forecasted and actual unemployment and inflation

  • Unemployment forecasted

to be persistently high

  • Inflation more sluggish than

unemployment but to ultimately return to 2%

12 FRB Boston Conference October 2016

Annual rate (year over year

slide-13
SLIDE 13

Inflation surprises

13

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0.6 0.8 1 1.2 1.4 1.6 1.8 2 2.2 2.4

FRBUS model Core Inflation forecast: June 2009 (o) Actual Core Inflation

FRB Boston Conference October 2016

slide-14
SLIDE 14

T

  • pic 1: Trend inflation

and inflation dynamics

  • Watson (2014) and Y

ellen (2015) study the behavior of inflation over lengthy samples using unemployment gaps as measure of slack, assuming with m+l=1 and with f=0.

  • In Y

ellen (2015) – Two lags rather than one – SPF measure of 10 year Core PCE inflation forecasts, but

relatively constant over 2008-2016

– Constraint imposed m=.4 and sum of l coefficients=.6 – Estimated c=-.08 – Relative import price inflation as x variable

14

1 t t t t t

m l cs gx        

FRB Boston Conference October 2016

slide-15
SLIDE 15

Key common implication

  • Y

ellen slope and lag estimates: c/ (1-l)=-.20

  • Watson estimates
  • Coefficient sum b(1) is -.20 over 1960-2013,
  • .21 over 1960-83 and -.19 over 1984-2013.
  • With trend at 2% and a 5% normal

unemployment rate, persistent change implies

15

( ) ( )

t t t t

L s L x   b     2 .2*( 5)

t t

u    

FRB Boston Conference October 2016

slide-16
SLIDE 16

Simulating Y ellen model

  • Initial condition: actual inflation 2008 Q1 & Q2
  • No import shocks (but think not important for

recent core inflation in Y ellen or Watson )

  • Slack is actual unemployment path minus 5%
  • SPF 10 year as measure of trend inflation, but

conduct an alternative with trend at 2%

  • Compare to simple model just discussed
  • Prediction is for quarter-to quarter inflation,

while prior chart had year-over year.

16 FRB Boston Conference October 2016

slide-17
SLIDE 17

Accounting for inflation

17

2008 2009 2010 2011 2012 2013 2014 2015 2016 0.5 1 1.5 2 2.5 3 3.5

long-term expected inflation (SPF 10 yr) simulated inflation (slack, expectations) with slope = -.08 simulated inflation (slack, expectations = 2) with slope = -.08; simple model (just slack) with slope =-.20 core inflation

FRB Boston Conference October 2016

slide-18
SLIDE 18

Comments and interpretation

  • Inflation is sluggish relative to slack (recall Simple

model is “just slack”)

  • Differences between simulations based on

SPF10year and constant trend (2%) are small

(echoes results in Fuhrer (2011,2012)

  • Surprises above are puzzles vis-a-vis this model:

– Rapid inflation decline in 2009 – Inflation around 2011 is too high – Recent inflation is too low

18 FRB Boston Conference October 2016

slide-19
SLIDE 19

Version with annual inflation

FRB Boston Conference October 2016 19

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0.8 1 1.2 1.4 1.6 1.8 2 2.2 2.4

Yellen model Actual PCE Core Inflation

slide-20
SLIDE 20

M issing short-term expectations?

20

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0.5 1 1.5 2 2.5 3

SPF series

1Q 2Q 1YR 10YR

FRB Boston Conference October 2016

slide-21
SLIDE 21

Putting SPF measures into Y ellen model

21

  • The measures are much more volatile
  • The measures co-vary with actual inflation
  • With fixed slope, these can have deflationary

implications just as in accelerationist model

  • Empirical studies have found much smaller

slopes (Fuhrer)

  • Rather than estimate slope, I just use a

smaller slope of -.03 to illustrate effect

FRB Boston Conference October 2016

slide-22
SLIDE 22

Completely forward-looking model

22 FRB Boston Conference October 2016

2008 2009 2010 2011 2012 2013 2014 2015 2016 0.5 1 1.5 2 2.5 3 3.5

Expected inflation (SPF 2Q) simulated inflation: Yellen model simulated inflation: no lags and slope= -.03 simple model with slope = -.20 core inflation

slide-23
SLIDE 23

Key dimensions related to puzzles

  • All measures fall sharply in late 2008 and early

2009 but perhaps too late

  • All measures rise during middle of period, but

not enough

  • All measures remain low in recent years
  • M aybe we need shorter-term expectations to

understand inflation since 2008

23 FRB Boston Conference October 2016

slide-24
SLIDE 24

Topic 2: M icro Price Dynamics

  • Since 2007, there has been a large literature devoted

to studying micro price dynamics using the data underlying the construction of the CPI and, to a lesser extent, the PPI.

  • Some of this literature can be interpreted (as I did at a

FRB Boston conference in 2007) as suggesting that the standard NK model based on Calvo price frictions focuses on exactly the wrong margin.

  • That is, I suggrested that we would be better off with a

model of fixed size of individual price adjustments and a varying fraction of prices adjusted in this manner.

24 FRB Boston Conference October 2016

slide-25
SLIDE 25

Conflicting evidence

  • Nakamura-Steinsson:

– Absolute size of price decreases larger than

increases

– Little change over time in size measures or the

frequency of price decreases

– Frequency of price increases moves with inflation

  • Klenow and coauthors (Kryvstov, M alin)

– Fraction of price changes in a period explains little

  • f changes in inflation

25 FRB Boston Conference October 2016

slide-26
SLIDE 26

Questions

  • What does more recent evidence produced by

Berger and Vavra (2015) indicate? [disclaimer]

  • In particular, what happened during Great

Recession and Gradual Recovery?

  • Can changing frequency help understand puzzling

aspects of inflation? – Answer in a purely accounting sense – Vavra (2015) connects changing frequency to slope of

Phillips curve, with greater flexibility in recessions, but do not explore that linkage here

26 FRB Boston Conference October 2016

slide-27
SLIDE 27

Long-term perspective on changing frequency

27

1975 1980 1985 1990 1995 2000 2005 2010 2015 0.06 0.065 0.07 0.075 0.08 0.085 0.09

Nakamura, Steinsson, Sun & Villar (2016): All Surveyed CPI Sectors

0.06 0.08 0.1 0.12 0.14 0.16 0.18

Absolute Size: mean = 0.075 Frequency: mean = 0.107

FRB Boston Conference October 2016

slide-28
SLIDE 28

Frequency measures from Berger-Vavra: Average frequency like Klenow and coauthors, M edian frequency (across sectors) like Nakamura and Steinsson

28 FRB Boston Conference October 2016

slide-29
SLIDE 29

Looking more closely at BV frequency measures over 2008-11

29 FRB Boston Conference October 2016

slide-30
SLIDE 30

Breaking inflation into frequency and size

  • M icro-based studies also concern only part of

CPI, since shelter and used vehicles components are estimated in other ways

  • M any micro-based studies define price

adjustment as changes in “ regular prices” which exclude sales and substitutions

  • M icro-based inflation measures are thus

smoother than published BLS indices

30 FRB Boston Conference October 2016

slide-31
SLIDE 31

Caveat on results to follow

  • Would ideally like to study micro-based CPI

excluding food and energy

  • But only have access (via Berger and Vavra) to

summary data on measures including these components.

31 FRB Boston Conference October 2016

slide-32
SLIDE 32

Behavior of inflation (0.5% per month is 6% per year)

32

2008 2008.5 2009 2009.5 2010 2010.5 2011 2011.5 2012

  • 2
  • 1.5
  • 1
  • 0.5

0.5 1 1.5

CPI less housing BV micro-based estimate FRB Boston Conference October 2016

slide-33
SLIDE 33

Decomposing inflation

  • Klenow-Kryvstov: inflation is the product of the

frequency of price change and the average size of price adjustment (pt=ft* mt)

  • Calculate implicit m as mt=pt/ ft
  • BV provide data on median size of price

adjustment, so employ this as alternative to implicit m.

  • Question: what does inflation look like if

frequency is fixed? Construct inflation with mean frequency, pt=f* mt

33 FRB Boston Conference October 2016

slide-34
SLIDE 34

Constructed inflation with implicit mean

34 FRB Boston Conference October 2016

slide-35
SLIDE 35

Actual inflation, median-based inflation with fixed and varying frequency

35

2008 2008.5 2009 2009.5 2010 2010.5 2011 2011.5 2012

  • 1
  • 0.5

0.5

BV micro inflation (SA) Inflation based on f*median Inflation based on (mean f)*median FRB Boston Conference October 2016

slide-36
SLIDE 36

Interpretation

  • For micro-based CPI including food and

energy, variations in frequency are irrelevant

  • ver 2008-2011.
  • Cannot help explain puzzling rapid drop in

inflation in late 2008 or rise in inflation around 2011 (both of which are present in micro- based inflation estimate)

36 FRB Boston Conference October 2016

slide-37
SLIDE 37

Comments on BLS research output

  • BLS regularly produces some public access data of

a “research series” form, for example “Labor force and employment smoothed for population control adjustments”

  • It would be useful for academics working on

micro pricing to help BLS create new pricing research series

  • What I’d like to have had: micro-based

components of CPI series plus breakdown into services, nondurables and durables with estimates of pt, ft and mt

37 FRB Boston Conference October 2016

slide-38
SLIDE 38

Summing Up

  • Identified three aspects of core PCE inflation

during the “Great Recession and Gradual Recovery” which are surprising vis-à-vis forecasts in June 2009 and puzzling vis-à-vis “anchored long-term expectations” model of Y ellen

  • Suggested that shorter-term inflation

expectations may be omitted factor

  • Explored possibility that changes in price

adjustment frequency could help, but found no evidence (from CPI data imperfectly matched to task) that this was so.

38 FRB Boston Conference October 2016

slide-39
SLIDE 39

Not core enough

FRB Boston Conference October 2016 39

slide-40
SLIDE 40

Not slack enough

FRB Boston Conference October 2016 40

slide-41
SLIDE 41

RULC, its components, inflation

FRB Boston Conference October 2016 41