Transcript PowerPoint-Presentation

The stagnation regime of the new keynesian
model and current US policy
George Evans
Discussion
Frank Smets
Asset prices, credit and macroeconomic policies
Marseilles
25-26 March 2011
The opinions expressed are our own and not necessarily those of the ECB, the Eurosystem or the NBB.
Introduction
•
Builds on previous work with Honkapohja and Guse,
which investigates which policies can avoid an
unstable deflationary spiral, which arises in a
standard New Keynesian model with active monetary
policy and passive fiscal policy, a zero lower bound on
interest rates and adaptive learning by the private
agents.
•
Proposed policy:
A combination of aggressive lowering of interest
rates to zero when a minimum inflation rate is
reached and expansionary government spending.
Introduction
Evans, Guse and Honkapohja (2008)
Introduction
Evans, Guse and Honkapohja (2008)
Introduction
•
What’s new?
•
The inclusion of downward nominal wage/price
rigidity. This explains why the economy may get
stuck at a low inflation equilibrium, rather than
trapped in a deflationary spiral (e.g. Japan)
•
A discussion of current US policies to avoid the
deflationary trap
•
Proposal:
• Aid to local municipalities and states to avoid
countercyclical fiscal policy in return for setting
up rainy-day funds.
• Large-scale public infrastructure works financed
by low interest rate bonds and central bank QE.
Introduction
Evans (2010)
Comments on proposals
•
The world has moved on in the meantime:
•
QE2: assessment of effectiveness of QE2 has been
quite positive (e.g. Krishnamurthy and VissingJorgensen (2011))
•
Unemployment is falling; inflation started rising;
government debt is accumulating.
•
But many elements of the proposal make a lot of
sense:
•
Importance of automatic stabilisers (US vs EU);
•
Rainy-day funds and the SGP;
•
Focus on productive government investment (but
lags are long and efficiency may be affected).
Comments/questions
•
How large has been the risk of a deflationary spiral?
•
What is the evidence of downward nominal wage
rigidity?
•
Can the policy recommendation be described as a
switch from a combination of active monetary and
passive fiscal policy to the reverse?
•
Fiscal space and government default risk?
•
What about a price-level targeting policy?
Inflation expectations: US vs euro area
5-year spot
5-year forwards 5 years ahead
3.0
4.0
2.0
3.0
1.0
2.0
0.0
US, 5-year forward 5-year ahead BEIR
1.0
US, 5-year BEIR
-1.0
Euro area, 5-year forward 5-year ahead BEIR
Euro area, 5-year BEIR
-2.0
0.0
95
97
99
01
03
05
07
09
95
97
99
01
03
05
07
09
Sharp rise in unemployment, but …
Wage inflation has not responded much
Survey evidence of downward nominal
wage rigidity in the euro area
Incidence of wage cuts and freezes during the crisis: follow-up survey
Total
Euro area
Non-euro area
% of firms cutting wages
Original
Follow-up survey
survey
% of firms freezing wages
Original
Follow-up survey
survey
did cut
will cut
3.2
2.1
6.5
3.1
3.3
2.7
did
freeze
34.5
37.1
27.4
2.6
1.3
6.4
9.5
7.6
14.8
will freeze
34.5
43.1
10.3
Notes: Source: Messina and Rõõm (2009). Figures for the original survey have been calculated including only the firms that are
in the 2009 sample. Figures are employment-weighted and rescaled excluding “do not know” answers. The sample includes AT,
BE, CZ, EE, ES, FR, IT, NL and PL. The construction sector is not covered by the follow-up survey in ES, FR and IT. The
financial intermediation sector is not covered by the follow-up survey in CZ, EE, ES, and FR. Country details in Table 5.2 of the
WDN Report.
Note:
The surveys were conducted in the context of the ESCB Wage Dynamics Network (WDN). See
http://www.ecb.europa.eu/home/html/researcher_wdn.en.html for the main findiings of the WDN and details of the surveys conducted. The
original survey was conducted mostly druing 2007. The follow-up survey was conducted mostly in the beginning of 2009.
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Fiscal theory of the price level
•
Can the policy recommendation be described as a
switch from a combination of active monetary and
passive fiscal policy to the reverse?
•
How large would the necessary fiscal expansion be in
that case? There is a need for realistic quantitative
versions of these models.
Sovereign CDS spreads (5-year in bp)
1200
1000
800
at
be
de
es
Jan 08 to Sep 08:
global increase in
risk aversion, first
moderate
increases in sov.
CDS
fi
fr
ie
it
nl
pt
Apr 10 to Feb 11:
focus on country risks
1000
800
Oct 08 to Mar 10:
risk transfer from fin. sector
to public sector
600
gr
1200
600
400
400
200
200
0
0
Jan-08
Source: Datastream
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
7
Euro area countries: rapid budget deterioration
General government budget balance
(as a percentage of GDP)
8
2007
2011
6
4
2
0
-2
-4
-6
SK
-8
PT
CY
FR
ES
-10
GR
-12
-14
IE
Source: European Commission Forecast (Spring 2010).
SI
NL
AT
BE
IT
DE
LU
MT
FI
Euro area countries: rapid rise in gross government debt
General government gross debt
(as a percentage of GDP)
160
2007
2011
140
120
100
80
60
40
20
0
LU
SK
SI
FI
CY
NL
ES
Source: European Commission Forecast (Spring 2010).
MT
AT
DE
IE
FR
PT
BE
IT
GR
Price level targeting
•
Is in my view too easily dismissed in the paper.
•
How does it change the stability analysis of the
New Keynesian model?
•
If a credible price level targeting regime is
established beforehand, then the learning rules
will adapt, which in turn will stabilise the
economy; much larger expectational shocks will
then be needed to get trapped in the
deflationary equilibrium.
•
Probably need long-horizon learning to analyse
this properly.
•
Needs to be symmetric.
End