The data: Unemployment, CPI inflation, and CPI inflation expectations (Prospera)

Transcription

1 Th Possibl Unmploymn Cos of Avrag Inflaion blow a Crdibl Targ Lars E.O. Svnsson Sockholm School of Economics Ocobr, Th daa: Unmploymn, CPI inflaion, and CPI inflaion xpcaions (Prospra) 99- CPI inflaion, Y/Y yr inflaion xpcaions yr inflaion xpcaions Unmploymn Issu! Avrag inflaion blow arg in Swdn 997-! Avrag inflaion xpcaions (Prospra) clos o arg 997- Qusions o b answrd:! If inflaion xpcaions suck a arg whn avrag inflaion dvias from arg, non-vrical long-run Phillips curv?! If lowr avrag inflaion, highr avrag unmploymn?! If simas of susainabl unmploymn ra basd on hisorical avrags, bias?! Policy conclusions for h fuur? 5-yar moving avrags: CPI inflaion xpcaions clos o %, CPI inflaion blow % CPI inflaion, Y/Y, 5yr moving avrag yr inflaion xpcaions, 5yr moving avrag yr inflaion xpcaions, 5yr moving avrag

2 Bfor 99: High CPI inflaion xpcaions (Aragon) Targ announcd Targ applis Crdibiliy achivd Avrag inflaion in som counris Counry Targ Indx Priod Avrag Dviaion Swdn (995-) CPI (995-) CPI Ausralia - (99-) CPI Canada (995-) CPI UK.5 (99-) RPIX (-) CPI -7.. (-) CPI CPI inflaion, Y/Y, prcn Inflaion nx yars Inflaion nx 5 yars Unmploymn Rpo ra Euro zon (< ) (999-) HICP -. US ( ) (-) cor CPI -. cor PCE Riksbank graph: Inflaion arg crcibl Non-raional inflaion xpcaions! Prospra inflaion xpcaions no raional (Jonsson and Ösrholm )! Nar-raional inflaion xpcaions?! Akrlof-Dickns-Prry (): For avrag inflaion clos o zro, a significan fracion of agns disrgard inflaion; bhav as if inflaion xpcaions ar zro

3 Nar-raional raional inflaion xpcaions Non-raional inflaion xpcaions! Hr, for avrag inflaion clos o %, a significan fracion of agns disrgard dviaion from %; bhav as if inflaion xpcaions ar %! Non-vrical Phillips curv applis for avrag inflaion no oo far from % (± %?) 9 Nar-raional raional inflaion xpcaions Wag slmns: Wha inflaion xpcaions?!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! Cnral wag slmns guid wag sing in Swdn, mor so from around! Th Indusrial Coopraion and Ngoiaion Agrmn 997: Wag sing in manufacuring indusry guids ohr wag sing! Th Trad Union Confdraion (LO) During h yars 995- h CPI has on avrag incrasd by. prcn Tha h pric incras has falln shor of h inflaion arg should no b h saring poin for a fuur assssmn. Insad, h rfrnc poin for wag formaion should b ha h Riksbank will aain h inflaion arg of prcn (Morin 9, p. 5, ranslad from Swdish)! Wag-sing wih inflaion xpcaions qual o prcn

4 Bfor 99: Inflaion arg no crdibl, igh monary policy, and high unmploymn From 997: Inflaion xpcaions suck a %, bu monary policy sill igh: Inflaion oo low, and unmploymn oo high π A π π = γ( u u*) A π * = π = B π = π = * π=. C D B u* u u* u 5 99: Inflaion arg gradually bcoms crdibl A Quarrly CPI inflaion, annual ra, sasonally adjusd π = π= π = * C B u=u* - - CPI inflaion, Y/Y, prcn CPI inflaion, Q/Q, SA, annual ra, prcn

5 Esima () shor-run Phillips curv π = γ γ ( u u ) γu + ε Sampl 997Q-Q Cofficin Esima Sd. Error -Saisic Prob. γ γ γ..9.. No: OLS, R =., adjusd R =.7, S.E. =.5, DW =.77. Cofficins on laggd inflaion no significan: Lvl Phillips curv insad of acclraion Phillips curv () Long-run Phillips curv π = γ γu Th long-run Phillips curv, 997Q-Q CPI inflaion, Q/Q, annual ra, prcnag poins Unmploymn, prcn 7 9 Th long-run Phillips curv, 997Q-Q Th slop of h long-run Phillips curv Sampl sars from 997Q o 999Q CPI inflaion, Q/Q, annual ra, prcnag poins Unmploymn, prcn Slop long-run Phillips curv 95 prcn confidnc inrval Bnchmark q 997q 997q 997q 99q 99q 99q 99q 999q 999q

6 Th unmploymn cos of avrag inflaion blow a crdibl arg! 997- avrag CPI inflaion. %! Avrag inflaion xpcaions abou %, a inflaion arg!. p.p. lowr inflaion givs./! =./.75 =. p.p. highr unmploymn on avrag during 997- CPI inflaion and unmploymn 97-, and bnchmark long-run Phillips curv 997- CPI inflaion, Y/Y, prcn. 97Q π =..7 ( u u ).75 u + ε 99Q (.7) (.) Q. p.p. π =..75 u 99Q 99Q. p.p Unmploymn, prcn Excss avrag unmploymn Sampl sar from 997Q o 99Q Nar-raional raional inflaion xpcaions Excss avrag unmploymn, pp 95 prcn confidnc inrval Bnchmark. pp q 997q 997q 997q 99q 99q 99q 99q 999q 999q!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

7 Som robusnss ss () Wih CPIXF inflaion, 997Q-Q Flar curv, highr unmploymn cos, lss prcision CPIXF inflaion, Q/Q, annual ra, prcnag poins Unmploymn, prcn 5 7 Considr () CPIXF inflaion insad of CPI inflaion and () unmploymn gap o Riksbank long-rm unmploymn - CPI inflaion, Y/Y CPIX/CPIF inflaion, Y/Y Unmploymn Riksbank long-rm unmploymn () Wih Riksbank unmploymn gap, flar curv, highr unmploymn cos, bias of simad long-rm unmploymn? CPI inflaion, Q/Q, annual ra, prcnag poins Unmploymn gap, prcnag poins

8 Rvisd Riksbank long-rm unmploymn gap, - CPI inflaion, Y/Y Unmploymn Riksbank long-rm unmploymn Rvisd Riksbank long-rm unmploymn Simulaniy? Wih laggd unmploymn, flar curv, highr unmploymn cos (Also SLS simaion) CPI inflaion, Q/Q, annual ra, prcnag poins Long-run Phillips curv: Sampl 997Q - Q Unmploymn, prcn 9 Avrag unmploymn as an sima of long-run naural ra (long-run susainabl ra of unmploymn, LSRU): Bias?! Avrag unmploymn biasd sima of LSRU?! Bias: (Avrag inflaion xpcaions - avrag inflaion)/.75! Riksbank July sima:.5% (midpoin)! My corrcion: 5.5%, bias.75 p.p. (appndix July minus) US, unmploymn and cor CPI, Y/Y, 97- Avrag inflaion - % Long-run Phillips curv Q-Q Cor CPI inflaion, Y/Y, prcn 97Q 999Q Q 9Q Unmploymn, prcn

9 US, unmploymn and cor CPI, Q/Q AR, - Long-run Phillips curv Q-Q Fuhrr () Cor CPI inflaiion, Q/Q, annual ra, prcn Q π =.5. π. u + ε Q Q Q Unmploymn, prcn (.) (.) π =.. u Canada, unmploymn and CPI, Y/Y,97- Avrag inflaion on arg 997-, % CPI inflaion, Y/Y, prcn 9Q 97Q 997Q Q 99Q 9Q Unmploymn, prcn 5 US, shor-run Phillips curv Q-Q: Rsiduals and acual and fid valus Lvl Phillips curv fis br han acclraion Phillips curv (solvs puzzl of Asrayuda, Ball, and Mazumdr ) Rsidual Acual Fid Canada, unmploymn and CPI, Q/Q AR,997- Long-run Phillips curv 997- CPI inflaion, Q/Q, annual ra, prcn - Q Q Q Unmploymn, prcn π =.9.57 Δu. u + ε (.5) (.) 997Q π =.9. u

10 Conclusions for h fuur?! Swdish (Prospra) inflaion xpcaions no raional! Nar raional? Suck a arg of % for avrag inflaion no oo far from arg?! No ha anchoring of inflaion xpcaions a arg is good: Easir o sabiliz unmploymn wihou oo much variaion in inflaion Rasons for undrshooing h arg?! Dos no mar for avrag unmploymn cos! Asymmric objciv? (Ciling?)! Ovrsimad inflaion prssur?! Ovrsimad long-run naural ra? (Mirror imag of Orphanids)! Ovrsimad impord inflaion?! Undrsimad produciviy growh?! Diffrn objciv: Rsricing houshold db?! Tighr policy bcaus of concrns abou houshold db! Giavazzi-Mishkin, sinc 5?! Dfinily now 7 9 Policy conclusions for h fuur?! Imporan o hold avrag inflaion clos o arg! Too low avrag inflaion can nail larg ral conomic coss! Br wih pric-lvl arging, avrag-inflaion arging ovr a longr priod?! Bias in simas of long-run susainabl ra of unmploymn (long-run naural ra)

11 A. Wag-sing wih inflaion xpcaions qual o h inflaion arg! Targ ral wag!w*, for arg mploymn,! Nominal wag s in advanc o achiv arg ral wag w =!w*+ p =!w*+ p + π! Acual ral wag!w w p = (!w*+ p + π ) ( p + π ) =!w*+ π π! Inflaion blow inflaion xpcaions and arg implis acual ral wag abov arg ral wag!w!w* = π π = π * π A. Sady sa: Ad hoc AD rlaion Phillips curv: π π = γ( u u*) + ε SS: π π = γ( u u*) AD rlaion: u u* = σ ( r r*) SS: u u* = σ ( r r*) Policy rul: r r* = απ ( π ) SS: r r* = απ ( π ) π π = γσα π π = γσα π π + π π π π = γσα +γσα (π π ) ( ) ( ) π π* π < = π π π π < < = *, u > u*, r > r* A. Th avrag unmploymn cos of avrag inflaion blow h arg is indpndn of h rasons for missing h arg Shor-run Phillips curv; assum srucural: π = γ γ( u u ) γu + ε Sampl avrags: π = γ γu + ε Avrag unmploymn consisn w/ avrag inflaion on arg: π* γ γu + ε Avrag unmploymn cos of undrshooing h arg: u u = ( π* π)/ γ u u is indpndn of ε, h sampl avrag of h shocks Naural ra: γ γu* No ha u u ε * if A. Sady sa: Nw Kynsian AD rlaion Phillips curv: π π = γ( u u*) + ε AD rlaion: u u* = E ( u u*) + σ ( r r*) + Policy rul: r r* = απ ( π ) SS: π = π π π* π π π π π SS: π π = γ( u u*) SS: r = r* < = = < = *, u > u*, r = r*

12 Exampl: A Nw-Classical Phillips curv w p = γ l w p = γl* p = p + π * p p + π p p = γ( l l*) = γ( u u*) π π = γ( u u*) Δ w = Δ p = Δ p = π ( w p ) ( w p ) = ( p p ) = ( π π ) = γ( u u*) NIER firm inflaion xpcaions CPI inflaion, Y/Y, prcn yr inflaion xpcaions, Prospra yr inflaion xpcaions, Prospra yr inflaion xpcaions, firms, NIER Riksbank s manda: Pric sabiliy and highs susainabl mploymn! Riksbank Ac (Ch., ar. ): Th objciv of h Riksbank aciviis shall b o mainain pric sabiliy.! Govrnmn bill (997/9:, p. ): wihou prjudic o h objciv of pric sabiliy, [h Riksbank] should suppor h objcivs of gnral conomic policy wih h purpos of achiving susainabl growh and high mploymn.! Manda: Pric sabiliy and highs susainabl mploymn! Wihou prjudic o h objciv of pric sabiliy: Kp avrag inflaion ovr longr priod on arg! Highs susainabl mploymn = Lows susainabl unmploymn NIER firm inflaion xpcaions 5-yr moving avrags CPI inflaion, 5yr moving avrag yr inflaion xpcaions, Prospra, 5yr moving avrag yr inflaion xpcaions, Prospra, 5yr moving avrag yr inflaion xpcaions, firms, NIER, 5yr moving avrag

13 Two inrpraions! Th inflaion arg has bn crdibl, h rlvan inflaion xpcaions ar sicky (anchord) a h arg, and hr has bn a subsanial avrag unmploymn cos of avrag inflaion blow h arg! Th inflaion arg has no bn crdibl, avrag inflaion xpcaions ar clos o avrag inflaion and no anchord a h arg, and hr has no bn any avrag unmploymn cos of avrag inflaion blow h arg 9 5 Wag slmns: Wha inflaion xpcaions? Mor robusnss ss! Th Indusrial Trad Unions (Fackn inom indusrin) (Dagns Nyhr Nov, ) (Also Fackn inom indusrin ): Riksbankns inflaionsmål är i dag ankar för dn konomiska poliikn och n självklar ugångspunk för vår agrand. Parrna har ansvar för a lönavaln in kommr i konflik md inflaionsmål. För höga och för låga lönökningar kan lda ill onödig hög arbslösh. Korsikiga variaionr i inflaionn bör in påvrka parrnas agrand. Skull parrna börja jaga illfälliga prisrörlsr upp och nr skull d bidra ill ökad insabili och försvåra Riksbankns arb. Parrna bör ugå från a Riksbankn gör si jobb och a inflaionn hamnar run vå procn. D bidrar ill a inflaionsförvänningarna hållr sig i närhn av inflaionsmål. 5 5