The Unassuming Economist

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.

In an article for the Peterson Institute for International Economics, economist Olivier Blanchard discusses 45 takeaways on the changing scope of fiscal policy and debt sustainability, in the light of consistently low interest rates. He also discusses three applications of the same- in the US, Japan, and Europe. Excerpts from the article:

• “A case of too little? The shift from output stabilization to debt reduction in the wake of the global financial crisis in Europe was too strong and too costly, reflecting an excessive weight on the costs of debt and an insufficient belief in the adverse effects of contractionary fiscal policy on demand and output.
• A case of just right? Faced with a strong case of secular stagnation, Japan has run large deficits for three decades and debt ratios have increased to very high levels, while the Bank of Japan remained at the effective lower bound. Was it the right strategy (if indeed it was a strategy)? The answer is a qualified yes, but, looking forward, the high debt ratios raise issues of debt sustainability. Alternative ways of boosting demand should be a high priority.
• A case of too much? To boost the US recovery from the initial COVID-19 shocks, the Biden administration embarked in 2021 on a major fiscal expansion. The strategy (again, if indeed it was a strategy) was for fiscal policy to increase demand and thus increase the neutral rate, and for monetary policy to delay the adjustment of the policy rate to the neutral rate, and in the process generate temporary inflation. Inflation has turned out to be much higher than expected. Was the fiscal expansion too strong? Was the strategy a mistake?”

Click here to read the full article.

While the Covid-19 pandemic hit the world very hard, it is particularly well known that developing economies took the largest hit. In that, Latin America’s “long-standing fiscal and social deficits” have compounded the problem for policymakers, as discussed in a recent blog for VoxEU CEPR by Ilan Goldfajn (Chairman of the Board, Credit Suisse) and Eduardo Levy Yeyati (Dean, School of Government, Universidad Torcuato Di Tella).

“The pandemic also flagged two long-standing but often overlooked regional deficits: poor state capacity, and labour exclusion and informality. This explains the region’s worse performance during the pandemic: larger welfare costs and meager relative recovery. Not surprisingly, societies face growing indifference with political regimes (Latinobarómetro 2021), and social outbursts in several countries, such as Chile or Colombia, reveal dissatisfaction which will likely limit economic policy looking forward. On the one hand, many countries came from a period of increased civil unrest that reduced the government’s ability to restrict mobility. On the other hand, lack of political cohesion made it more difficult to implement restrictions, which inevitably led to lockdown fatigue and declining compliance. On top of that, a background of discontent and/or ongoing recessions clouded any perception of effective pandemic response.”

The article then moves on to discuss some areas that may possibly restrain constructive policy solutions, such as the limited size of the public sector given the already mounting primary deficit, populist policy temptations clashing with economically robust policies, etc.

Read the full blog here.

The National Council of Applied Economic Research (NCAER) recently hosted Dr. Gita Gopinath, currently serving as the Chief Economist at the IMF for a discussion on the outlook for global growth in 2022. Among other things, the discussion touched upon topics like vaccination for protection against Covid-19, inflationary pressures in several countries, and the unique set of challenges before policymakers.

Watch the full video here.