Deflationary Shocks And De-Anchoring Of Inflation Expectations

with Fabio Busetti, Davide Delle Monache, Andrea Gerali and Alberto Locarno (Bank of Italy).

Venue: Board Room - Central Bank of Ireland

Time: 17 April 2015 at 13.00

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Abstract. A prolonged period of low inflation can heighten the risk of inflation expectations deanchoring from the central bank’s objective, particularly when monetary policy rates are near the zero lower bound. This paper investigates the effects of a sequence of deflationary shocks on expected/realized inflation and output. To do so we consider a simple New Keynesian model where agents have incomplete information about the working of the economy and form expectations through an adaptive learning process (in the sense that they behave like econometricians, using regressions to anticipate the future value of the variables of interest). The model is simulated with euro area data over the period 2014-16 under assumptions of both rational expectations and learning. The main findings are the following: (i) under learning, price dynamics in 2015-16 is 0.6 percentage points lower on average than in the case of fully rational agents, as inflation expectations are strongly affected by repeated deflationary shocks; (ii) the learning process implies a (data-driven) de-anchoring of inflation expectations from the central bank’s target, which would be perceived by economic agents to fall to 0.8 per cent at the end of 2016; (iii) output expectations would also be lower in the case of learning, resulting in a slower recovery of economic activity.

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The macroeconomic effects of the European Monetary Union's fiscal consolidation from 2011 to 2013

with Christian Schoder, Vienna University of Economics and Businessand and Jan Strasky, Organisation for Economic Co-operation and Development (OECD).

Venue: Board Room - Central Bank of Ireland

Time: 18 February 2015 at 14.30

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Abstract

We explore the impact of the fiscal consolidation pursued by the Euro Area between 2011 and 2013 by employing versions of two DSGE models developed for fiscal policy analysis by the ECB (the New Area Wide Model) and the European Commission (QUEST III). Our analysis takes into account that monetary policy was constrained by the zero lower bound. It turns out that if the consolidation measures are credibly permanent, the fiscal consolidation caused only a weak decline in GDP compared to the magnitude of the fiscal consolidation, and the government debt-to-GDP ratio quickly falls below the non-consolidation baseline. Allowing for limited fiscal credibility increases the fiscal consolidations effect on GDP. For plausibly calibrated values of the share of liquidity constrained households and in the presence of a financial accelerator along the lines of Bernanke et al. (1999), the fiscal consolidation increases the government debt-to-GDP ratio for four years or more relative to a non-consolidation baseline. 

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Transparency, Expectations Anchoring and the Inflation Target

Venue: Board Room, Spencer Dock Premises - Central Bank of Ireland

Time: 25 September 2014 at 14.00

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Inflation Risk Measures and Their Informational Content

Venue: Liffey Room (Dame Street) - Central Bank of Ireland

Time: 15 August 2014 at 14.30

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Learning from experience in the stock market

Venue: Liffey Room (Dame Street) - Central Bank of Ireland

Time: 29 July at 14.30

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Fiscal multipliers in a small euro area economy: How big can they get in crisis times?

Venue: Room 1, College Green - Central Bank of Ireland

Time: 3 June 2014 at 15.00

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Macroprudential Policy Implementation in a Heterogeneous Monetary Union

Venue: Liffey Room - Central Bank of Ireland

Time: 3 April 2014 at 14.30

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Mortgage Amortization and Welfare 

Venue: Liffey Room - Central Bank of Ireland

Time: 19 March 2014 at 14.30

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Optimal Monetary and Macroprudential Policy in the Estimated DSGE Model of the Norwegian Economy

Venue: Atlas Building - Central Bank of Ireland

Time: 14 March 2014 at 10.00

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Now-casting and the real-time data flow

Venue: Liffey Room - Central Bank of Ireland

Time: 27 February 2014 at 15.00

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