Research Review | 27 November 2020 | Inflation

The Trade-off between Inflation and Unemployment in an MMT World
Emilio Carnevali (Northumbria U.) and Matteo Deleidi (Roma Tre U.)
October 2020
This paper is focused on Modern Monetary Theory’s (MMT) treatment of inflation from an open economy perspective. It analyzes how the inflation process is explained within the MMT framework and provides empirical evidence in support of this vision. However, it also makes use of a stock-flow consistent (open economy) model to underline some limits of the theory when it is applied in the context of a non-US (relatively) open economy with a flexible exchange rate regime. The model challenges the contention made by MMTers that measures such as the job guarantee program can achieve full employment without facing an inflation-unemployment trade-off.

The US Money Explosion of 2020, Monetarism and Inflation: Plagued by History?
Richard C. K. Burdekin (Claremont McKenna College)
November 6, 2020
Although the Federal Reserve’s quantitative easing of early 2020 was comparable in scale to 2008-2009, the implications for the growth of money in circulation and future inflationary pressures appear quite different. Absent the unprecedented surge in bank excess reserve ratios seen in 2008 and after, massive monetary base increases imply the possibility of a much larger, and potentially worrisome, increase in the money in circulation. Rising inflation expectations are implied by such phenomena as the surging demand for Treasury Inflation Protected Securities and record highs for gold prices during the summer of 2020. These trends lend some support to market participants evincing concern that the surging money growth is, in fact, a precursor to future inflation. Historical perspective on the 2020 situation is provided by data from the time of the 1918-1919 Spanish flu and available documentation of inflation following medieval and Roman-era pandemics. Indications of extra upward pressure on prices arising from pent-up spending after the epidemic has passed include the surge in bank loans in the aftermath of the 1918-1919 Spanish Flu pandemic.

A Note on the Impact of News on US Household Inflation Expectations
Ben Zhe Wang (Macquarie University), et al.
September 25, 2020
Monthly disaggregated US data from 1978 to 2016 reveals that exposure to news on inflation and monetary policy helps to explain inflation expectations. This remains true when controlling for household personal characteristics, perceptions of government policy effectiveness, future interest rates and unemployment expectations, and sentiment. We find an asymmetric impact of news on inflation and monetary policy after 1983, with news on rising inflation and easier monetary policy having a stronger effect in comparison to news on lowering inflation and tightening monetary policy. Our results indicate the impact on inflation expectations of monetary policy news manifested through consumer sentiment during the lower bound period.

Uncertainty Shocks and Inflation Dynamics in the US
Qazi Haque and Leandro M. Magnusson (U. of Western Australia)
November 10, 2020
We estimate a time-varying parameter VAR (TVP-VAR) with stochastic volatility using post-WWII U.S. data to study the effects of uncertainty shocks on inflation. We find the response of inflation to be statistically insignificant until mid-to-late 1990s and negative thereafter. Our findings suggest that uncertainty shocks do not propagate like aggregate supply shocks and look like aggregate demand shocks since late 1990s.

Inflation, Investment and Valuation
Bradford Cornell (Anderson Graduate School of Management, UCLA), et al.
October 4, 2020
In any context where a discounted cash flow valuation is required, there is the issue of estimating the continuing value. The most common way to do that is to assume that by the terminal horizon the company is in a steady state and is growing at a constant rate. The issue is how to handle inflation. The problem is that it is often done wrong and the impact is typically material. Because there remains significant confusion, in this paper we simplify the analysis by isolating the two key issues and providing example calculations. We show that even at the current 2% level proper treatment of inflation has a size-able impact on valuation. If inflation were to accelerate as a result of current monetary and fiscal policies, the significance of this issue will increase.

Evidence of Accelerating Mismeasurement of Growth and Inflation in the U.S. In the 21st Century
Leonard I. Nakamura (Federal Reserve Bank of Philadelphia)
October 2020
Corporate equity market values, profitability, and intangible investment have reached high proportions of income. Are these investments and their outcomes evidence of a wellfunctioning society? We do not see the rapid growth in aggregate measures of output that would justify these investments and rewards. And why did the yield curve invert as the U.S. federal funds rate reached 2⅜ percent in early 2019, if the inflation rate was near 2 percent? We present the broad case that mismeasurement of growth and prices accelerated in the U.S. during the 21st century and may be responsible for the appearance of secular stagnation in the U.S. We argue that it is possible that productivity growth has accelerated and that prices have been deflating during much of the 21st century. The evidence is very incomplete; large uncertainties surround these estimates. Indeed, the main message of this paper is that uncertainty in economic measurement has risen substantially.

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