IDEAS home Printed from https://ideas.repec.org/p/fip/fedlwp/2018-024.html
   My bibliography  Save this paper

Understanding Lowflation

Author

Listed:
  • David Andolfatto
  • Andrew Spewak

Abstract

Central banks are viewed as having a demonstrated ability to lower long-run inflation. Since the financial crisis, however, the central banks in some jurisdictions seem almost powerless to accomplish the opposite. In this article, we offer an explanation for why this may be the case. Because central banks have limited instruments, long-run inflation is ultimately determined by fiscal policy. Central bank control of long-run inflation therefore ultimately hinges on its ability to gain fiscal compliance with its objectives. This ability is shown to be inherently easier for a central bank determined to lower inflation than for a central bank determined to accomplish the opposite. Among other things, the analysis here suggests that for the central banks of advanced economies, any stated inflation target is more credibly viewed as a ceiling.

Suggested Citation

  • David Andolfatto & Andrew Spewak, 2018. "Understanding Lowflation," Working Papers 2018-24, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2018-024
    DOI: 10.20955/wp.2018.024
    as

    Download full text from publisher

    File URL: https://s3.amazonaws.com/real.stlouisfed.org/wp/2018/2018-024.pdf
    File Function: Full text
    Download Restriction: no
    File URL: https://doi.org/10.20955/wp.2018.024
    File Function: https://doi.org/10.20955/wp.2018.024
    Download Restriction: no
    File URL: https://libkey.io/10.20955/wp.2018.024?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Krugman, Paul, 2000. "Thinking About the Liquidity Trap," Journal of the Japanese and International Economies, Elsevier, vol. 14(4), pages 221-237, December.
    2. Paul Beaudry & Franck Portier, 2014. "News-Driven Business Cycles: Insights and Challenges," Journal of Economic Literature, American Economic Association, vol. 52(4), pages 993-1074, December.
    3. Bruce D. Smith, 1991. "Interest on Reserves and Sunspot Equilibria: Friedman's Proposal Reconsidered," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(1), pages 93-105.
    4. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66(6), pages 467-467.
    5. Andolfatto, David & Martin, Fernando M., 2018. "Monetary policy and liquid government debt," Journal of Economic Dynamics and Control, Elsevier, vol. 89(C), pages 183-199.
    6. James B. Bullard, 2018. "Allan Meltzer and the Search for a Nominal Anchor: a speech at the \"Meltzer's Contributions to Monetary Economics and Public Policy, Philadelphia, Pa," Speech 296, Federal Reserve Bank of St. Louis.
    7. Cochrane, John H., 2014. "Monetary policy with interest on reserves," Journal of Economic Dynamics and Control, Elsevier, vol. 49(C), pages 74-108.
    8. James B. Bullard, 2018. "Allan Meltzer and the Search for a Nominal Anchor," Review, Federal Reserve Bank of St. Louis, vol. 100(2), pages 117-126.
    9. Gorton, Gary B., 2010. "Slapped by the Invisible Hand: The Panic of 2007," OUP Catalogue, Oxford University Press, number 9780199734153.
    10. Andolfatto, David & Williamson, Stephen, 2015. "Scarcity of safe assets, inflation, and the policy trap," Journal of Monetary Economics, Elsevier, vol. 73(C), pages 70-92.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Oleksiy Kryvtsov & James MacGee, 2020. "Has the Inflation Process Changed? Selective Review of Recent Research on Inflation Dynamics," Discussion Papers 2020-11, Bank of Canada.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Brent Hueth & Maro Ibarburu & James Kliebenstein, 2005. "Business Organization and Coordination in Marketing Specialty Hogs: A Comparative Analysis of Two Firms from Iowa," Center for Agricultural and Rural Development (CARD) Publications 05-wp415, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    2. James Bullard, 2016. "Permazero," Cato Journal, Cato Journal, Cato Institute, vol. 36(2), pages 415-429, Spring/Su.
      • James B. Bullard, 2016. "Permazero," Review, Federal Reserve Bank of St. Louis, vol. 98(2).
      • James B. Bullard, 2015. "Permazero," Speech 256, Federal Reserve Bank of St. Louis.
    3. Ennis, Huberto M., 2018. "A simple general equilibrium model of large excess reserves," Journal of Monetary Economics, Elsevier, vol. 98(C), pages 50-65.
    4. Athreya, Kartik B., 2014. "Big Ideas in Macroeconomics: A Nontechnical View," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262019736, December.
    5. Magill, Michael & Quinzii, Martine, 2015. "Prices and investment with collateral and default," Journal of Economic Dynamics and Control, Elsevier, vol. 51(C), pages 111-132.
    6. Ricardo Reis, 2016. "QE in the future: the central bank's balance sheet in a financial crisis," Discussion Papers 1620, Centre for Macroeconomics (CFM).
    7. Begona Dominguez & Pedro Gomis-Porqueras, 2019. "The effects of secondary markets for government bonds on inflation dynamics," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 32, pages 249-273, April.
    8. Brunnermeier, Markus K. & Oehmke, Martin, 2013. "Bubbles, Financial Crises, and Systemic Risk," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1221-1288, Elsevier.
    9. Schaal, Edouard & Taschereau-Dumouchel, Mathieu, 2023. "Herding through booms and busts," Journal of Economic Theory, Elsevier, vol. 210(C).
    10. Laura Nowzohour & Livio Stracca, 2020. "More Than A Feeling: Confidence, Uncertainty, And Macroeconomic Fluctuations," Journal of Economic Surveys, Wiley Blackwell, vol. 34(4), pages 691-726, September.
    11. Lukas Altermatt & Kohei Iwasaki & Randall Wright, 2023. "General Equilibrium with Multiple Liquid Assets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 267-291, December.
    12. Ricardo Reis, 2017. "QE in the Future: The Central Bank’s Balance Sheet in a Fiscal Crisis," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 65(1), pages 71-112, April.
    13. Athanasios Geromichalos & Jiwon Lee & Seungduck Lee & Keita Oikawa, 2014. "Over-the-Counter Trade and the Value of Assets as Collateral," Working Papers 143, University of California, Davis, Department of Economics.
    14. Xavier Freixas & David Perez-Reyna, 2017. "The Gilded Bubble Buffer," Documentos CEDE 15789, Universidad de los Andes, Facultad de Economía, CEDE.
    15. Douglas Gale & Tanju Yorulmazer, 2020. "Bank capital, fire sales, and the social value of deposits," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 69(4), pages 919-963, June.
    16. Ozhan, Galip Kemal, 2020. "Financial intermediation, resource allocation, and macroeconomic interdependence," Journal of Monetary Economics, Elsevier, vol. 115(C), pages 265-278.
    17. Dhital, Saroj & Gomis-Porqueras, Pedro & Haslag, Joseph H., 2021. "Monetary and fiscal policy interactions in a frictional model of fiat money, nominal public debt and banking," European Economic Review, Elsevier, vol. 139(C).
    18. Lucas Herrenbrueck, 2019. "Interest rates, moneyness, and the Fisher equation," 2019 Meeting Papers 1409, Society for Economic Dynamics.
    19. Ozhan, Galip Kemal, 2020. "Financial intermediation, resource allocation, and macroeconomic interdependence," Journal of Monetary Economics, Elsevier, vol. 115(C), pages 265-278.
    20. Mathieu Boullot, 2017. "Secular Stagnation, Liquidity Trap and Rational Asset Price Bubbles," Working Papers halshs-01295012, HAL.

    More about this item

    Keywords

    Inflation; Inflation targeting; Fiscal policy;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedlwp:2018-024. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Anna Oates (email available below). General contact details of provider: https://edirc.repec.org/data/frbslus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.