The Macroeconomic Risks of Undesirably Low Inflation

49 Pages Posted: 4 May 2016

See all articles by Jonas Arias

Jonas Arias

Federal Reserve Bank of Philadelphia

Christopher J. Erceg

Board of Governors of the Federal Reserve System

Mathias Trabandt

Board of Governors of the Federal Reserve System; Sveriges Riksbank

Date Written: 2016-04-12

Abstract

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.

Keywords: Inflation Expectations, Wages, Productivity, Disination, Monetary Policy, Liquidity Trap, DSGE Model

JEL Classification: E52, E58

Suggested Citation

Arias, Jonas and Erceg, Christopher J. and Trabandt, Mathias, The Macroeconomic Risks of Undesirably Low Inflation (2016-04-12). FRB International Finance Discussion Paper No. 1162, Available at SSRN: https://ssrn.com/abstract=2774643 or http://dx.doi.org/10.17016/IFDP.2016.1162

Jonas Arias (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

10 N Independence Mall W
Philadelphia, PA 19106
United States

Christopher J. Erceg

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2575 (Phone)
202-736-5638 (Fax)

Mathias Trabandt

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Sveriges Riksbank ( email )

Brunkebergstorg 11
SE-103 37 Stockholm
Sweden

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