The Unassuming Economist

In a piece for the VoxEU CEPR blog, Professors Francesco D’ Acunto of Boston College and Michael Weber of Booth School of Business, University of Chicago write about rising inflation in the times of Covid-19 pandemic, and why it may be worrisome for reasons even beyond those that we think most about. Aside from the three channels that have been discussed often (pent-up demand pressures, supply constraints, and labor shortages), they bring into focus the self-fulfilling nature of consumers’ expectations of prices that impacts inflation rates.

The natural question then is why should policymakers be concerned about households’ expectations of price levels anyway.

“The concern is that a surge in inflation expectations might become self-fulfilling. Recent research uses microdata to document that higher inflation expectations often result in higher consumer spending before prices increase. Further demand pressure given the post-COVID supply bottlenecks would push inflation even higher.” They further go on to add, “households might also demand higher wages to keep their perceived purchasing power constant based on their elevated inflation expectations.”

Click here to read the full article.

They say economists rarely agree on one thing.

However, now this statement may not hold true as before. Based on a survey of members of the American Economic Association, a paper by Doris Geide-Stevenson and Alvaro La Parra Perez of the Weber State University compares the academic positions of economists over four decades.

“The main result is an increased consensus on many economic propositions, specifically the appropriate role of fiscal policy in macroeconomics and issues surrounding income distribution. Economists now embrace the role of fiscal policy in a way not obvious in previous surveys and are largely supportive of government policies that mitigate income inequality. Another area of consensus is concern with climate change and the use of appropriate policy tools to address climate change.”

Click here to download the paper and here to be a part of the discussion on it.

A 2021 report published by the Financial Market Authority Liechtenstein discusses the weak relationship between national output and unemployment in the country, given by Okun’s law in economic theory. The report deliberates upon this phenomenon as follows:

“One explanation for the missing link between employment and the business cycle is a shortage of skilled labor. In addition to labor market regulations, the decoupling of the business cycle and employment can be explained by hiring costs associated with search frictions that tend to have increased over the last decades (Ball, Leigh, and Loungani, 2017). The Swiss Employment Barometer indicates that skilled labor is especially difficult to find in sectors such as metal or machinery industries, which are relatively large in Liechtenstein. Against this background, it is plausible that the decoupling between employment and business cycle dynamics progressed in a stronger manner and earlier in Liechtenstein compared to other advanced economies.”

Click here to read the full report.

Laurence M. Ball of the Johns Hopkins University, and Daniel Leigh, Prachi Mishra, and Antonio Spilimbergo of the International Monetary Fund write about the core inflation rate in the US in a paper for the National Bureau of Economic Research (NBER).

Abstract:

“Large price changes in industries affected by the COVID-19 pandemic have caused erratic fluctuations in the U.S. headline inflation rate. This paper compares alternative approaches to filtering out the transitory effects of these industry price changes and measuring the underlying or core level of inflation over 2020-2021. The Federal Reserve’s preferred measure of core, the inflation rate excluding food and energy prices, has performed poorly: over most of 2020-21, it is almost as volatile as headline inflation. Measures of core that exclude a fixed set of additional industries, such as the Atlanta Fed’s sticky-price inflation rate, have been less volatile, but the least volatile have been measures that filter out large price changes in any industry, such as the Cleveland Fed’s median inflation rate and the Dallas Fed’s trimmed mean inflation rate. These core measures have followed smooth paths, drifting down when the economy was weak in 2020 and then rising as the economy has rebounded.”

Click here to read the full paper.

John H. Cochrane, Senior Fellow at the Hoover Institution (Stanford University) writes about the inflationary impact of pent-up demand in the post-pandemic period in his blog, The Grumpy Economist. He writes:

“Milton Friedman once said that if you want inflation, you can just drop money from helicopters. That is basically what the US government has done. But this US inflation is ultimately fiscal, not monetary. People do not have an excess of money relative to bonds; rather, people have extra savings and extra apparent wealth to spend. Had the government borrowed the entire $5 trillion to write the same checks, we likely would have the same inflation.”

In the subsequent sections, he discusses reasons why the Covid-19 related fiscal stimulus produce inflation when previous stimulus efforts from 2008 to 2020 fizzled.

Click here to read the full blog.