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Inflation Dynamics When Inflation Is Near Zero

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  • JEFFREY C. FUHRER
  • GIOVANNI P. OLIVEI
  • GEOFFREY M. B. TOOTELL

Abstract

This paper discusses the likely evolution of U.S. inflation in the near and medium term on the basis of (1) past U.S. experience with very low levels of inflation, (2) the most recent Japanese experience with deflation, and (3) recent U.S. micro evidence on downward nominal wage rigidity. Our findings question the view that stable long-run inflation expectations and downward nominal wage rigidity will provide sufficient support to prices such that deflation can be avoided. We show that an inflation model fitted on Japanese data over the past 20 years, which accounts for both short- and long-run inflation expectations, matches the recent U.S. inflation experience quite well. While the model indicates that U.S. inflation might be subject to a lower bound, it does not rule out a prolonged period of mild deflation going forward. In addition, our micro evidence on wages suggests no obvious downward rigidity in the firm's wage costs, downward rigidity in individual wages notwithstanding. As a consequence, downward nominal wage rigidity may provide little offset to deflationary pressures in the current U.S. situation, despite some circumstantial evidence that this channel might have been at work in the past.
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Suggested Citation

  • Jeffrey C. Fuhrer & Giovanni P. Olivei & Geoffrey M. B. Tootell, 2012. "Inflation Dynamics When Inflation Is Near Zero," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 83-122, February.
  • Handle: RePEc:mcb:jmoncb:v:44:y:2012:i::p:83-122
    DOI: j.1538-4616.2011.00479.x
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    References listed on IDEAS

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    1. David Card & Dean Hyslop, 1997. "Does Inflation "Grease the Wheels of the Labor Market"?," NBER Chapters,in: Reducing Inflation: Motivation and Strategy, pages 71-122 National Bureau of Economic Research, Inc.
    2. Emmanuel De Veirman, 2009. "What Makes the Output-Inflation Trade-Off Change? The Absence of Accelerating Deflation in Japan," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(6), pages 1117-1140, September.
    3. George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 1-76.
    4. Ricardo Nunes, 2010. "Inflation Dynamics: The Role of Expectations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(6), pages 1161-1172, September.
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    Cited by:

    1. repec:eee:jjieco:v:46:y:2017:i:c:p:53-68 is not listed on IDEAS
    2. Kazuo Ueda, 2014. "Comment on “Chronic Deflation in Japan”," Asian Economic Policy Review, Japan Center for Economic Research, vol. 9(1), pages 40-41, January.
    3. Benjamin Wong, 2015. "Do Inflation Expectations Propagate the Inflationary Impact of Real Oil Price Shocks?: Evidence from the Michigan Survey," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(8), pages 1673-1689, December.
    4. Hattori, Masazumi & Yetman, James, 2017. "The evolution of inflation expectations in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 46(C), pages 53-68.
    5. Kenji Nishizaki & Toshitaka Sekine & Yoichi Ueno, 2014. "Chronic Deflation in Japan," Asian Economic Policy Review, Japan Center for Economic Research, vol. 9(1), pages 20-39, January.
      • Kenji Nishizaki & Toshitaka Sekine & Yuichi Ueno & Yuko Kawai, 2013. "Chronic deflation in Japan," BIS Papers chapters,in: Bank for International Settlements (ed.), Globalisation and inflation dynamics in Asia and the Pacific, volume 70, pages 9-19 Bank for International Settlements.
    6. Hoang, Thi Hong Van & Lahiani, Amine & Heller, David, 2016. "Is gold a hedge against inflation? New evidence from a nonlinear ARDL approach," Economic Modelling, Elsevier, vol. 54(C), pages 54-66.
    7. Kumar, Anil & M. Orrenius, Pia, 2016. "A closer look at the Phillips curve using state-level data," Journal of Macroeconomics, Elsevier, vol. 47(PA), pages 84-102.
    8. Jeffrey C. Fuhrer, 2012. "Real expectations: replacing rational expectations with survey expectations in dynamic macro models," Working Papers 12-19, Federal Reserve Bank of Boston.
    9. Dany-Knedlik, Geraldine & Holtemöller, Oliver, 2017. "Inflation dynamics during the financial crisis in Europe: Cross-sectional identification of long-run inflation expectations," IWH Discussion Papers 10/2017, Halle Institute for Economic Research (IWH).
    10. Fuhrer, Jeff, 2017. "Expectations as a source of macroeconomic persistence: Evidence from survey expectations in a dynamic macro model," Journal of Monetary Economics, Elsevier, vol. 86(C), pages 22-35.
    11. repec:eee:ecmode:v:71:y:2018:i:c:p:202-213 is not listed on IDEAS
    12. Richard Peach & Robert W. Rich & M. Henry Linder, 2013. "The parts are more than the whole: separating goods and services to predict core inflation," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 19(Aug).

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