Embed Size (px)
Citation preview
My presentation is based on:
Liquidity Traps and Jobless Recoveries
Stephanie Schmitt-Grohe Martın Uribe
Columbia University
January 3, 2016
Recent Examples of the Joint Occurrence of a Jobless
Growth Recovery and a Liquidity Trap.
1. United States: 2008-
2. Japan: 1991-2000
3. Euro Area: 2008-
2
Jobless Growth Recovery with Liquidity Trap
United States, 2005Q1-2015Q3
2005 2010 2015−6
−4
−2
0
2p
erc
en
t p
er
ye
ar
Real Per Capita GDP Growth, yoy
2005 2010 201558
59
60
61
62
63
64Employment−Population Ratio
pe
rce
nt
2005 2010 20150
1
2
3
4
5
6
pe
rce
nt
Federal Funds Rate
2005 2010 20150
0.5
1
1.5
2
2.5
3
3.5Inflation, GDP deflator, yoy
pe
rce
nt
pe
r ye
ar
Vertical lines: NBER recession dates, 2007Q4 and 2009Q2
3
Jobless Growth Recovery with Liquidity TrapJapan, 1989-2001
1990 1992 1994 1996 1998 20000
2
4
6
8
10Interest Rate, call rate
Perc
ent P
er
Year
1990 1992 1994 1996 1998 2000−2
−1
0
1
2
3Inflation, GDP deflator, yoy
Perc
ent P
er
Year
1990 1992 1994 1996 1998 2000
−2
0
2
4
6Real Per Capita GDP Growth, yoy
Perc
ent P
er
Year
1990 1992 1994 1996 1998 200059
60
61
62
63Employment−to−Population Ratio
Perc
ent
Vertical lines: Cabinet Office Recession dates, 1991Q1, 1993Q4, 1997Q2, 1999Q1.
4
Jobless Growth Recovery with Liquidity Trap
Euro Area, 2005-2015
2005 2010 2015
0
1
2
3
4
Interest Rate, Eonia
Pe
rce
nt
Pe
r Y
ea
r
2005 2010 2015
0
1
2
3
4Inflation Rate, HICP
Pe
rce
nt
Pe
r Y
ea
r
2005 2010 2015−6
−4
−2
0
2
4P
erc
en
t P
er
Ye
ar
Real Per Capita GDP Growth
2005 2010 2015
69
70
71
72
73
Employment−Population Ratio, male
Pe
rce
nt
Vertical lines: CEPR business cycle dates, 2008Q1, 2009Q2, 2011Q3
5
Three Key Elements of a Model of the JointOccurrence of a Liquidity Trap and a JoblessGrowth Recovery
1. Downward Nominal Wage Rigidity.
2. A Taylor Rule.
3. A Downward Revision in Inflation Expectations.
6
Downward Nominal Wage Rigidity.
Wt ≥ γ(ut) Wt−1,
where
• Wt denotes the nominal wage rate.
• ut denotes the unemployment rate .
Assumption: γ′(u) < 0. Wages become more downwardly
flexible as unemployment increases.
7
The Labor Market
Labor Demand: WtPt
= XtF′(ht)
Inelastic Labor Supply: ht ≤ h
Downward Wage Rigidity: Wt ≥ γ(ut)Wt−1 ⇒ WtPt
≥ γ(h−ht)πt
Wt−1Pt−1
h
XtF′(ht)
A
Wt
Pt
ht
γ(h−ht)πL
Wt−1
Pt−1
γ(h−ht)π∗
Wt−1
Pt−1
B
hL
If πt = π∗, then the equilibrium is atpoint A. → full employment
If πt = πL < π∗, then the equilibrium
is at point B. → involuntary
unemployment
8
Two Steady States:
The Liquidity Trap (πL) and the Intended One (π∗)
The Taylor Rule: Rt = max {1, R∗ + απ (πt − π∗)}
The Euler Equation: U ′(Ct) = βRtEtU ′(Ct+1)
πt+1
In the steady state they become, respectively,
R = max {1, R∗ + απ(
π − π∗)} and R = β−1π
πL
1
π∗
R∗
π
R
Solid Line: R = max {1, R∗ + απ (π − π∗)}
Broken Line: Euler equation R = β−1π
9
Conventional View of Liquidity Trap:
Inflationary expectations are well anchored (i.e., inflation
is expected to return to target, π∗) and liquidity trap is the
consequence of negative shocks to the natural rate of interest.
Exercise: Assume that the natural rate falls from its steady-
state value of 4 percent per year to -2 percent per year for 10
quarters and then returns to 4 percent forever.
Result: Recovery is job creating, inflation is monotonically increasing
during the recovery, and output growth is above average during
the recovery. All three predictions are counterfactual.
10
Response to a Persistent Decline In The Natural Rate
0 5 10 15 20−15
−10
−5
0
5Inflation
% a
nnual
t
0 5 10 15 2093
94
95
96
97
98
99
100Employment Rate
%
t
0 5 10 15 200
1
2
3
4
5
6
7Interest Rate
% a
nnual
t
0 5 10 15 20−20
−15
−10
−5
0
5Output Growth Rate
% a
nnual
t
11
Conventional view requires that economy is continuously surprised by yet
another negative natural rate shock:
Source: Laubach and Williams, 2015; in turn taken from Curdia, 2015.
12
Alternative View: A Downward Revisionin Inflation Expectations.
Agents stop believing that the central bank will be able to bring
the economy back to π∗. Instead agents believe that inflation
will settle at πL < π∗.
“Mr. Draghi and his peers are afraid that consumers and investors will increasingly
see low inflation as the new normal, creating a self-fulfilling prophecy.” NYT,
page B7, November 22, 2014.
Exercise: Assume that in period 0 agents start believing that in
the long run inflation is below target.
Result: Recovery is job less, inflation is monotonically declining
during the recovery, and output growth is below average during
the recovery. All three predictions are consistent with the data.
13
Effects of A Downward Revision in Inflationary Expectations
0 10 20 30 40 50−4
−3
−2
−1
0
1
2Inflation
% a
nnual
t
0 10 20 30 40 5094
95
96
97
98
99
100Employment Rate
%
t
0 10 20 30 40 500
1
2
3
4
5
6Interest Rate
% a
nnual
t
0 10 20 30 40 500.4
0.6
0.8
1
1.2
1.4
1.6
1.8Output Growth Rate
% a
nnual
t
14
Evidence on Downward Revision of Long-Run Inflation
Expectations in the U.S.
Source: FRB Minneapolis, https://www.minneapolisfed.org/banking/mpd#
15
Exiting the Slump: Tightening is Easing
0 10 20 30 40 50−4
−3
−2
−1
0
1
2
3Inflation
% a
nnual
t
0 10 20 30 40 5094
95
96
97
98
99
100Employment Rate
%
t
0 10 20 30 40 500
1
2
3
4
5
6
7Interest Rate
% a
nnual
t
0 10 20 30 40 500
0.5
1
1.5
2
2.5
3Output Growth Rate
% a
nnual
t
16
Conclusion
• Japan in the 1990s, and the U.S. and the Eurozone post 2008
experienced a liquidity trap with a jobless growth recovery.
• When the liquidity trap as a consequence of negative shocks
to the natural rate, then recovery is job creating, which is
counterfactual.
• If liquidity trap is the consequence of a shock to inflation
expectations, then recovery is jobless.
• In an economy that suffers a confidence shocks to inflation
expectations, an increase in nominal rates can contribute to
re-anchoring expectations around the intended target and
lifting the economy out of a slump.
17
