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The Macroeconomic Risks of Undesirably Low Inflation

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This paper investigates the macroeconomic risks associated with undesirably low inflation using a medium-sized New Keynesian model. We consider different causes of persistently low inflation, including a downward shift in long-run inflation expectations, a fall in nominal wage growth, and a favorable supply-side shock. We show that the macroeconomic effects of persistently low inflation depend crucially on its underlying cause, as well as on the extent to which monetary policy is constrained by the zero lower bound. Finally, we discuss policy options to mitigate these effects.

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  • Jonas E. Arias & Christopher J. Erceg & Mathias Trabandt, 2016. "The Macroeconomic Risks of Undesirably Low Inflation," International Finance Discussion Papers 1162, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:1162
    DOI: 10.17016/IFDP.2016.1162
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    1. Risks Associated with Low Inflation
      by thebusinesscycleblog in The business cycle blog on 2016-05-15 03:31:58

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    Cited by:

    1. Athanasios Orphanides, 2020. "The fiscal–monetary policy mix in the euro area: challenges at the zero lower bound," Economic Policy, CEPR;CES;MSH, vol. 35(103), pages 461-517.
    2. Evans, George W. & Honkapohja, Seppo & Mitra, Kaushik, 2016. "Expectations, stagnation and fiscal policy," Bank of Finland Research Discussion Papers 25/2016, Bank of Finland.
    3. Jarociński, Marek & Maćkowiak, Bartosz, 2018. "Monetary-fiscal interactions and the euro area's malaise," Journal of International Economics, Elsevier, vol. 112(C), pages 251-266.
    4. Mikhail Chernov & Lukas Schmid & Andres Schneider, 2020. "A Macrofinance View of U.S. Sovereign CDS Premiums," Journal of Finance, American Finance Association, vol. 75(5), pages 2809-2844, October.
    5. Corsello, Francesco & Neri, Stefano & Tagliabracci, Alex, 2021. "Anchored or de-anchored? That is the question," European Journal of Political Economy, Elsevier, vol. 69(C).
    6. Michel Alexandre & Gilberto Tadeu Lima, 2020. "Combining monetary policy and prudential regulation: an agent-based modeling approach," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 15(2), pages 385-411, April.
    7. Gerke, Rafael & Giesen, Sebastian & Kienzler, Daniel, 2020. "Interest rate pegs and the reversal puzzle: On the role of anticipation," Discussion Papers 50/2020, Deutsche Bundesbank.
    8. Kollmann, Robert & Leeper, Eric & Roeger, Werner, 2016. "The Post-Crisis Slump," MPRA Paper 71291, University Library of Munich, Germany.
    9. Gerke, Rafael & Giesen, Sebastian & Kienzler, Daniel & Tenhofen, Jörn, 2017. "Interest-rate pegs, central bank asset purchases and the reversal puzzle," Discussion Papers 21/2017, Deutsche Bundesbank.
    10. Grace Taylor & Rod Tyers, 2017. "Secular Stagnation: Determinants and Consequences for Australia," The Economic Record, The Economic Society of Australia, vol. 93(303), pages 615-650, December.
    11. Augustin, P. & Chernov, M. & Schmid, L. & Song, D., 2021. "Benchmark interest rates when the government is risky," Journal of Financial Economics, Elsevier, vol. 140(1), pages 74-100.
    12. Marzie Taheri Sanjani & Stefan Laseen, 2016. "Did the Global Financial Crisis Break the U.S. Phillips Curve?," IMF Working Papers 2016/126, International Monetary Fund.
    13. Debrun, Xavier & Masuch, Klaus & Ferrero, Guiseppe & Vansteenkiste, Isabel & Ferdinandusse, Marien & von Thadden, Leopold & Hauptmeier, Sebastian & Alloza, Mario & Derouen, Chloé & Bańkowski, Krzyszto, 2021. "Monetary-fiscal policy interactions in the euro area," Occasional Paper Series 273, European Central Bank.
    14. Kenny, Geoff & Dovern, Jonas, 2017. "The long-term distribution of expected inflation in the euro area: what has changed since the great recession?," Working Paper Series 1999, European Central Bank.
    15. Harashima, Taiji, 2018. "Why Are Inflation and Real Interest Rates So Low? A Mechanism of Low and Floating Real Interest and Inflation Rates," MPRA Paper 84311, University Library of Munich, Germany.

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    More about this item

    Keywords

    Inflation Expectations; Wages; Productivity; disinflation; Monetary Policy; Liquidity Trap; DSGE Model;
    All these keywords.

    JEL classification:

    • 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

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