Introduction
The missing disinflation
Possible explanations
Proposed explanation
Labor Economics
Unemployment and inflation-Recent developments
Petr Sedláček
Bonn University
Winter 2014/2015
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Introduction
The missing disinflation
Possible explanations
Proposed explanation
Unemployment-inflation relationship
6
5
Unemployment gap
4
Inflation change
3
2
1
0
-1
-2
-3
-4
-5
1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005
Source: FRED.
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Introduction
The missing disinflation
Possible explanations
Proposed explanation
The Great Depression in the US
very high levels of unemployment
above 20% between 1932 and 1935
very large levels of disinflation
above 10% per year in 1932
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Introduction
The missing disinflation
Possible explanations
Proposed explanation
The Great Recession in the US
high levels of unemployment
as high as 10% in 2010
only little decline in inflation since the crisis
slightly negative in 2009, otherwise around 2.5%
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Introduction
The missing disinflation
Possible explanations
Proposed explanation
Is the Phillips curve dead?
“Prior to the recent deep worldwide recession, macroeconomists of
all schools took a negative relation between slack and declining
inflation as an axiom. Few seem to have awakened to the recent
experience as a contradiction to the axiom.”
Bob Hall (2013)
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Introduction
The missing disinflation
Possible explanations
Proposed explanation
The “modern” Phillips curve
The missing disinflation
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Introduction
The missing disinflation
Possible explanations
Proposed explanation
The “modern” Phillips curve
The “modern” Phillips curve
New Keynesian models
such as Clarida, Gali, Gertler (1999), Woodford (2003)
provide micro-foundations for a Phillips curve:
πt − Et πt+1 = c + κxt + υt
xt is a measure of economic activity
υt cost-push shocks
c: constant
Et πt+1 : expected inflation
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Introduction
The missing disinflation
Possible explanations
Proposed explanation
The “modern” Phillips curve
The “modern” Phillips curve
as a baseline take backward-looking inflation expectations
see e.g. Ball and Mazumder (2011)
Et πt+1 = 1/4
4
X
πt−j
j=1
and use unemployment as a measure of activity
8 / 30
Introduction
The missing disinflation
Possible explanations
Proposed explanation
The “modern” Phillips curve
The missing disinflation
FIGURE 1: THE MISSING DISINFLATION
Panel A: CPI Inflation and U.S. Unemployment
4
09Q4
09Q3
11Q1
11Q2
09Q2
10Q4
2
07Q4
08Q3
08Q2
St-ESt
-2
BACK
0
08Q1
12Q4
12Q3
13Q1
12Q1
11Q3 10Q3
10Q1
-4
12Q2
11Q4
10Q2
-8
-6
09Q1
3
4
5
6
7
8
Unemployment rate
9
10
11
Source: Coibion, Gorodnichenko (2013).
Panel B: CPI Inflation and Predicted Inflation from Phillips Curve
9 / 30
Introduction
The missing disinflation
Possible explanations
Proposed explanation
Wrong price-inflation measure
Unemployment gap
Marginal costs/wage inflation
Time-varying slopes
Forward-looking expectations
Possible explanations
10 / 30
Introduction
The missing disinflation
Possible explanations
Proposed explanation
Wrong price-inflation measure
Unemployment gap
Marginal costs/wage inflation
Time-varying slopes
Forward-looking expectations
Other inflation measures
FIGURE 2: ROBUSTNESS OF THE MISSI
Panel A: PCE Inflation
4
09Q3
4
09Q4
St-ESt
; GDP deflator inflation
-4
-2
0
2
; PCE inflation
-2
0
2
07Q4
11Q2
11Q1
08Q2
12Q3
13Q1
12Q4 12Q1
09Q210Q4
10Q1
11Q3
10Q3
10Q2
11Q4
09Q1
12Q2
-8
-8
-6
-6
BACK
St-ESt
-4
BACK
08Q1
08Q3
3
4
5
6
7
8
Unemployment rate
Source: Coibion, Gorodnichenko (2013).
9
Panel C: Core CPI Inflation
10
11
3
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Introduction
The missing disinflation
Possible explanations
Proposed explanation
Wrong price-inflation measure
Unemployment gap
Marginal costs/wage inflation
Time-varying slopes
Forward-looking expectations
Other OF
inflation
measures
ROBUSTNESS
THE MISSING D
ISINFLATION
Panel B: GDP Deflator Inflation
09Q3
St-ESt
; GDP deflator inflation
-4
-2
0
2
4
09Q4
Q2
Q1
08Q3
08Q2
08Q1
07Q4
10Q2
10Q1
11Q3 10Q309Q4
11Q2
10Q4
11Q1
12Q3
12Q1
13Q1
12Q412Q2
09Q3
09Q1
11Q4
09Q2
-8
-6
BACK
09Q210Q4
10Q1
Q3
10Q3
10Q2
10
11
3
4
5
6
7
8
Unemployment rate
Source: Coibion, Gorodnichenko (2013).
9
Panel D: Core PCE Inflation
10
11
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BA
St-ESt
-4
-6
St-4
Wrong price-inflation measure
Unemployment gap
Marginal costs/wage inflation
Time-varying slopes
Forward-looking expectations
-8
-8
-6
Introduction
The missing disinflation
Possible explanations
Proposed explanation
3
4
5
6
7
8
Other inflation
measures
Unemployment rate
9
10
11
3
; PCE CORE inflation
-2
0
2
; CPI CORE inflation
-2
0
2
4
4
Panel C: Core CPI Inflation
11Q2
11Q1
11Q3
07Q4
08Q1
08Q3
13Q1 12Q2
11Q4
12Q1
12Q4 09Q1
12Q3
08Q2
08Q4
09Q4
09Q2
10Q3
10Q4
09Q3
10Q2
-8
-8
-6
-6
St-ESt
-4
St-ESt
-4
BACK
BACK
10Q1
3
4
5
6
7
8
Unemployment rate
Source: Coibion, Gorodnichenko (2013).
9
10
11
3
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4
St-ESt
-6
St-E
-4
Wrong price-inflation measure
Unemployment gap
Marginal costs/wage inflation
Time-varying slopes
Forward-looking expectations
-8
-8
-6
Introduction
The missing disinflation
Possible explanations
Proposed explanation
3
4
5
6
7
8
Other inflation
measures
Unemployment rate
9
10
11
3
4
Panel E: SPF Inflation (CPI) Forecasts
11Q1
11Q2
07Q4 08Q2
08Q1
2
, partial out oil price changes
-2
0
2
4
08Q3
09Q3
09Q4
10Q4
11Q3
09Q2
SPF
0
12Q1
12Q4
12Q3
St-ESt
13Q1
11Q4
10Q3
10Q1
-2
12Q2
St-ESt
-4
-4
BACK
10Q2
-6
-6
09Q1
3
4
5
6
7
8
Unemployment rate
Source: Coibion, Gorodnichenko (2013).
9
10
11
-2
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BA
St-ESt
-4
Wrong price-inflation measure
Unemployment gap
Marginal costs/wage inflation
Time-varying slopes
Forward-looking expectations
-8
-6
Introduction
The missing disinflation
Possible explanations
Proposed explanation
11
Other
inflation measures
10
3
4
5
6
7
8
Unemployment rate
9
10
11
; PCE CORE inflation
-2
0
2
4
Panel D: Core PCE Inflation
Q2
Q1
Q3
09Q4
09Q2
10Q3
10Q4
09Q3
10Q2
08Q3
09Q4
11Q2
12Q1 11Q3
09Q3
11Q109Q2
10Q2
12Q2
10Q1
13Q1
12Q4
12Q3 11Q4
10Q4
10Q3
09Q1
-8
-6
St-ESt
-4
BACK
10Q1
07Q4
08Q2
08Q1
10
11
3
4
5
6
7
8
Unemployment rate
Source: Coibion, Gorodnichenko (2013).
9
10
11
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St-ESt
-
Wrong price-inflation measure
Unemployment gap
Marginal costs/wage inflation
Time-varying slopes
Forward-looking expectations
-8
-6
Introduction
The missing disinflation
Possible explanations
Proposed explanation
10
11
3
4
5
6
7
8
Other
inflation
measures
Unemployment rate
sts
9
10
11
Panel F: Controlling for Oil Prices
4
09Q4
, partial out oil price changes
-2
0
2
09Q3
1Q1
1Q2
09Q3
09Q4
10Q4
1Q3
09Q2
10Q3
10Q1
11Q2
10Q4
12Q4
07Q4
08Q1
11Q3
12Q3
09Q2
10Q1
10Q3
08Q2
13Q1
12Q2
12Q1
09Q1
10Q2
11Q4
-6
St-ESt
-4
BACK
10Q2
11Q1
08Q3
10
11
-2
0
2
4
Unemployment rate, partial out oil price changes
Source: Coibion, Gorodnichenko (2013).
6
16 / 30
Introduction
The missing disinflation
Possible explanations
Proposed explanation
Wrong price-inflation measure
Unemployment gap
Marginal costs/wage inflation
Time-varying slopes
Forward-looking expectations
Use unemployment gap instead
instead of the unemployment rate
use the unemployment rate gap as measure of activity
Utgap = Ut − Utnat.
Utnat. : CBO short-term natural rate of unemployment estimate
17 / 30
Introduction
The missing disinflation
Possible explanations
Proposed explanation
Wrong price-inflation measure
Unemployment gap
Marginal costs/wage inflation
Time-varying slopes
Forward-looking expectations
Using
unemployment gap instead
FIGURE 3: DOES THE MISSING DISINFLATION REFLECT STRUCTURAL UNEMPLOYMENT?
Panel A: Missing Disinflation with CBO Unemployment Gaps
4
09Q4
09Q3
11Q1
11Q2
2
07Q4
08Q3
09Q2
10Q4
08Q2
0
08Q1
12Q4
12Q3
BACK
13Q1
11Q3
St-ESt
-2
12Q1
-4
12Q2
11Q4
10Q3
10Q1
10Q2
-8
-6
09Q1
-2
-1
0
1
2
Unemployment gap
Source: Coibion, Gorodnichenko (2013).
3
4
5
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Panel B: Changes in Natural Rate of Unemployment Needed to Explain Missing Disinflation
09Q2
08Q3
St-ESt
-2
BACK
0
Introduction08Q2
The missing disinflation
08Q1
Possible explanations
Proposed explanation
10Q4
Wrong price-inflation
measure
Unemployment
gap
12Q4
12Q3 costs/wage inflation
Marginal
13Q1
11Q3 10Q3
Time-varying
slopes10Q1
12Q1
Forward-looking
expectations
12Q2
-4
11Q4
10Q2
have to change?
09Q1
-6
How much would
Utnat.
-8
use estimated Phillips curve coefficients
-2
-1
0
1
2
3
impute Utnat. consistent
with
inflation
path 4
Unemployment
gap
5
0
2
4
6
8
10
12
Panel B: Changes in Natural Rate of Unemployment Needed to Explain Missing Disinflation
2007
2008
2009
predicted natural rate
Actual CBO natural rate
2010
2011
2012
2013
95% CI for predicted rate
Actual unemployment rate
Source: Coibion, Gorodnichenko (2013).
Notes: Panel A plots quarterly levels of the unemployment gap (the difference between actual unemployment and
19 / 30
Introduction
The missing disinflation
Possible explanations
Proposed explanation
Wrong price-inflation measure
Unemployment gap
Marginal costs/wage inflation
Time-varying slopes
Forward-looking expectations
Wage inflation instead
marginal costs are the relevant variable based on models
look at wage inflation rather than (consumer) prices
consider backward-looking wage inflation expectations
20 / 30
Introduction
The missing disinflation
Possible explanations
Proposed explanation
Wrong price-inflation measure
Unemployment gap
Marginal costs/wage inflation
Time-varying slopes
Forward-looking expectations
Wage inflation
IS THERE A MISSING WAGE DISINFLATION?
FIGURE 4:instead
Panel A: Avg. Hourly Earnings, Manufacturing Workers
Source: Coibion,Business
GorodnichenkoSector
(2013). Compensation per Hour
Panel B: Non-Farm
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Introduction
The missing disinflation
Possible explanations
Proposed explanation
Wrong price-inflation measure
Unemployment gap
Marginal costs/wage inflation
Time-varying slopes
Forward-looking expectations
Wage inflation instead
Panel B: Non-Farm Business Sector Compensation per Hour
Coibion, net
Gorodnichenko
(2013).
Panel C: Weekly ManufacturingSource:
Earnings
of Livingston
Professional Forecasts
22 / 30
Wrong price-inflation measure
Unemployment gap
Marginal costs/wage inflation
Time-varying slopes
Forward-looking expectations
Introduction
The missing disinflation
Possible explanations
Proposed explanation
Time-varying slope of Phillips curve
allow for time-variation in the slope of the Phillips curve
break in the Phillips curve slope coefficient in 1985Q1
FIGURE 5: TIME VARIATION IN THE SLOPE OF THE PHILLIPS CU
Panel A: Sample Split in mid-1980s, Backward-Looking PC
Panel B: Sample Split in
4
4
09Q4
09Q3
11Q1
2
11Q2
08Q3
09Q2
10Q4
, GDP deflator
2
07Q4
12Q4
12Q3
13Q1
11Q3
12Q1
-4
10Q3
10Q1
SPF
12Q2
11Q4
St-ESt
0
0
08Q1
St-ESt
-2
BACK
08Q2
10Q2
09Q1
-3
-2
-1
-2
-6
1960Q1-1984Q4
1985Q1-2007Q3
2007Q3-2013Q1
0
1
2
Unemployment gap
3
Source: Coibion, Gorodnichenko (2013).
4
5
-3
-2
-1
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Panel C: Counterfactual Inflation Paths from Time-Varying Slopes
Introduction
The missing disinflation
Possible explanations
Proposed explanation
Wrong price-inflation measure
Unemployment gap
Marginal costs/wage inflation
Time-varying slopes
Forward-looking expectations
Forward-looking expectations
all the above remains to hold with forward-looking
expectations
proxy inflation expectations with those of professional
forecasters
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Introduction
The missing disinflation
Possible explanations
Proposed explanation
Wrong price-inflation measure
Unemployment gap
Marginal costs/wage inflation
Time-varying slopes
Forward-looking expectations
Bottom line
inflation dynamics seem to be at odds with unemployment
path
robust to alternative inflation measures
robust to the unemployment gap
historical unemployment-inflation relationship suggests
a large shift in the natural rate of unemployment
inconsistent with CBO estimate and other studies (see e.g.
Elsby, Hobijn, Sahin, 2010, Daly et al., 2012)
not driven by wage inflation
not driven by time-varying slopes
robust to professional forecasters forward-looking expectations
25 / 30
Introduction
The missing disinflation
Possible explanations
Proposed explanation
Households’ expectations?
Households’ and firms’ expectations
Proposed explanation
26 / 30
Introduction
The missing disinflation
Possible explanations
Proposed explanation
Households’ expectations?
Households’ and firms’ expectations
Which expectations matter?
which inflation expectations matter?
those of firms!
problematic because there is no explicit data on them
27 / 30
Introduction
The missing disinflation
Possible explanations
Proposed explanation
Households’ expectations?
Households’ and firms’ expectations
Compare expectations across agents
1980
1985
1990
Asset Prices
1995
2000
2005
Michigan
Source: Coibion, Gorodnichenko (2013).
2010
SPF (CPI)
Panel C: Counterfactual Inflation (CPI) Paths for Different Expectations
-6
0
-4
2
4
6
St-ESt
-2
MSC
0
8
10
2
12
4
FIGURE 6: THE PHILLIPS CURVE AND THE MISSING DISINFLATION WITH
Panel A: Inflation Expectations for Different Economic Agents
Panel B
-3
28 /Panel
30 D: R
Introduction
The missing disinflation
Possible explanations
Proposed explanation
Households’ expectations?
Households’ and firms’ expectations
Missing disinflation?
4
MISSING DISINFLATION WITH HOUSEHOLD INFLATION EXPECTATIONS
c Agents
Panel B: Phillips Curve with Household Inflation Expectations
2
1960Q1-1984Q4
1985Q1-2007Q3
2007Q3-2013Q1
07Q4
08Q3
09Q3
09Q4
0
08Q1
St-ESt
-2
MSC
11Q1
11Q2
08Q2
-4
11Q3
12Q412Q1
12Q3
11Q4
13Q1 12Q2
10Q4
09Q2
10Q3
10Q1
10Q2
-6
09Q1
I)
Expectations
-3
-2
-1
0
1
2
Unemployment gap
3
4
5
Source: Coibion, Gorodnichenko (2013).
Panel D: Relative Contributions of Slopes and Inflation Expectations
29 / 30
Introduction
The missing disinflation
Possible explanations
Proposed explanation
Households’ expectations?
Households’ and firms’ expectations
Households’ and firms’ expectations
Are households’ expectations a better measure?
1.include both expectation measures in Phillips curve
estimate weight on the two measures
robust across specifications - weight on households’ close to 1
2. preliminary evidence from firm survey in New Zealand
evidence suggests that households’ expectations are much
closer to those of firms compared to professional forecasters’
expectations
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