The views expressed in this paper are those of the authors and do not necessarily represent the views of the Federal Reserve Bank of Boston or the Federal Reserve System.
Inflation Dynamics When Inflation Is Near Zero
Version of Record online: 3 FEB 2012
© 2012 The Ohio State University
Journal of Money, Credit and Banking
Volume 44, Issue Supplement s1, pages 83–122, February 2012
How to Cite
FUHRER, J. C., OLIVEI, G. P. and TOOTELL, G. M. B. (2012), Inflation Dynamics When Inflation Is Near Zero. Journal of Money, Credit and Banking, 44: 83–122. doi: 10.1111/j.1538-4616.2011.00479.x
- Issue online: 3 FEB 2012
- Version of Record online: 3 FEB 2012
- Received December 6, 2011; and accepted in revised form October 7, 2011.
- anchored expectations;
- survey expectations;
- downward nominal wage rigidity;
- Phillips curve
We discuss the likely evolution of U.S. inflation in the near and medium terms on the basis of (i) past U.S. experience with very low levels of inflation, (ii) the most recent Japanese experience with negative inflation, and (iii) some preliminary U.S. micro evidence on downward nominal wage rigidity. Our findings question the view that stable long-run inflation expectations and downward nominal wage rigidity will necessarily provide sufficient support to prices to avoid further declines in inflation. We show that an inflation model fitted on Japanese data over the past 20 years, which accounts for both short- and long-run inflation expectations, matches the recent U.S. inflation experience quite well. While the model indicates that U.S. inflation might be subject to a lower bound, it does not rule out a prolonged period of low inflation or even mild deflation going forward. In addition, micro-level data on wages suggest no obvious downward rigidity in the firm's wage bill, downward rigidity in individual wages notwithstanding. As a consequence, downward nominal wage rigidity may not be enough to offset deflationary pressures in the current situation.