Coibion and Gorodnichenko on the missing disinflation

Here is their abstract (pdf):

We evaluate possible explanations for the absence of a persistent decline in inflation during the Great Recession and find commonly suggested explanations to be insufficient. We propose a new explanation for this puzzle within the context of a standard Phillips curve. If firms’ inflation expectations track those of households, then the missing disinflation can be explained by the rise in their inflation expectations between 2009 and 2011. We present new econometric and survey evidence consistent with firms having similar expectations as households. The rise in household inflation expectations from 2009 to 2011 can be explained by the increase in oil prices over this time period.

Writing on the paper, here is Jim Hamilton’s bottom line:

The phenomenon identified by Coibion and Gorodnichenko would undermine the Fed’s ability to stimulate the economy in a number of important respects. First, it makes it much more difficult for the Fed to try to justify its actions to the public on the grounds that inflation is currently too low. Second, if makes it harder for the Fed to stimulate the economy without raising inflation, particularly if one byproduct of stimulus efforts is an increase in the relative price of oil. Third, it implies that ex ante real interest rates, if we base that concept on the perceptions of large numbers of economically important decision makers, are extremely negative at the moment, casting doubt on the claim that a primary policy objective should be to make them even more negative.


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