Download 1 Discussion: From Chronic Inflation to Chronic Deflation Gita

Discussion:FromChronicInflationtoChronicDeflation
GitaGopinath
HarvardUniversity
Withoutadoubt,thefinancialcrisisof2008anditslonglingeringeffectshave
changedthelensthroughwhichmacroeconomistsviewtheworld.Whilepreviously
developedmarketswerecharacterizedashavingfrictionlessandbenignfinancial
markets,the2008financialcrisisthatoriginatedinthedevelopedworlddispelled
allnotionsofthis.Asaconsequenceitisnownearimpossibletodiscuss
macroeconomicswithoutexplicitlydescribingtheinteractionsofeconomicagents
andtheimperfectworldoffinance.
However,itisimportanttohighlightthatforinternationalmacroeconomists,of
whichGuillermoCalvoismostprominent,thefailuresoffinancialmarketshave
beenatthecenterofunderstandingtheeconomiesofemergingmarkets,economies
thathaveroutinelybeenbuffetedbyfinancialanddebtcrisis.ThisgivesGuillermo
whoisoneoftheleadingexpertsonemergingmarketcrisisanedgeoverother
macroeconomistsinanalyzingthiscrisisandpointingustolessonsforthefutureof
macroeconomics.ThisiswhyhiscontributiontothisconferenceissovaluableandI
thoroughlyenjoyedreadinghispaper.
GuillermomakesseveralimportantpointsinthepaperofwhichIwillhighlighta
few,butIencouragethereadertodelveintothemanyothercontributionsinthe
1
paper.Guillermoflagstwomajorblindspotsthatpolicymakershaveignoredatthe
periloftheireconomies.Thefirstisthepowerofexpectationstodriveself-fulfilling
crisiswhenpolicymakerssuffertheoriginalsinofnotbeingabletocommit,socalledexpectationsdominance.Thesecondisthatliquidityscarcitycanariserapidly,
havelonglastingeffectsontheeconomyandconventionalmonetarypolicycanfail
torescuetheeconomy.AsGuillermogoesontodescribe,therearetwoimportant
policyrecommendationsthatfollowfromthis:First,thereisaneedtoensure
sufficientsupplyofsafe/liquidassets.Second,theworldbenefitsfromaglobal
coordinationofpoliciessoexpectationsarecoordinatedonthegoodequilibria.I
willreinforcebothofthesepoints.
AsGuillermohighlightstheinabilityofevensocialwelfaremaximizingcentral
bankerstocommittopolicywasamajorfactorinthehyperinflationsofthepast.
Thisistiedtothetimeinconsistencyproblemwheremonetaryauthoritieswould
liketocommittonotinflatingex-antebutthenex-posthaveeveryincentiveto
generalsurpriseinflationsoastostimulatetheeconomy,increaseseignorageand
lowertherealvalueofnominaldebt.Forward-lookingprivateagentsofcourse
expectthisandraisepricesinanticipationtherebyraisingequilibriuminflation.
Similarly,expectationscangeneratetemporaryboomsthateventuallygobadand
governmentscanmisinterpretthecauseoftheboom.AsanexampleGuillermo
pointstotheconsumptionboomsthatfollowedexchangeratebasedstabilizations
inemergingmarkets.Hearguesthatitisexpectationsofthefailureofthe
2
stabilizationreformmeasuresthatgenerateatemporaryconsumptionboomas
agentsfront-loadpurchasesofgoodsinanticipationofareturntohighinflationin
thefuture.
Theimportanceofexpectationsdominanceandself-fulfillingcrisiswasevidentin
the2012debtcrisisintheEurozone.Asyieldsongovernmentdebtroserapidlyin
GreeceandspilledovertoIreland,Portugal,SpainandItaly,theEuropeanCentral
Bank’s(ECB)presidentMarioDraghipromisedtodowhateverittakestosavethe
euroincludingpossiblybuyingstressedgovernmentdebt.Themerepromiseofthis
broughtyieldsdownrapidlyevenintheabsenceofanypurchasesbytheECB.This
eventnotonlyhighlightstheroleofexpectationsdominanceingeneratingcrisisbut
importantlypointsouttheerrorsoftheframersofthecommoncurrencyareawho
restrictedtheECBfrombeingthelenderoflastresort.Aguiar,Amador,Farhi,
Gopinath(2015)describeself-fulfillingcrisisinmonetaryunionsandtheimportant
roleofcentralbankstointerveneinastate-contingentmannertoalleviatesuch
crisis.
Aguiar,Amador,Farhi,Gopinath(2014)alsodescribehowtheabilitytoinflatedoes
notnecessarilyreducethepotentialforself-fulfillingcrisis.InthemidstoftheGreek
crisisitwasarguedbyseveralleadingeconomiststhattheproblemarosebecause
Greekdebtwasreal,astheGreek’sdidnotcontrolthesupplyofthecurrencyin
whichthedebtwasdenominated,andrequiredfiscalsurplusestopayindown.In
contrastifthedebthadbeendenominatedinacurrencyoverwhichthecountryhas
3
directcontrolasinthecaseofU.S.andJapanesedebtthengovernmentsalsohave
theoptionofinflatingsomeofthedebtsoastomakeiteasiertorepay.This
argumentisflawedtotheextentthatitignorestheroleofexpectations.Whendebt
isinnominaltermsandiflendersexpecttheuseofinflationtoreducetherealvalue
ofdebtthenthisgetspricedintonominalinterestratesandconsequentlythereisno
additionalgainfrombeingabletocontrolthecurrencyinwhichdebtis
denominated.
AsecondthemeinGuillermo’sessayisaboutliquidityanditsfragility.Clearlyitcan
betrickytodescribewhataliquidassetis,somethingGuillermogetsintoatsome
length,butthepointthattherecanbeasuddencollapseinliquidityrelativetothe
demandforitthatinturncanhaveimportantnegativeandlastingconsequencesfor
4
theeconomyisapointthathasbeenemphasizedrecentlybymanyeconomists.In
the‘safeassets’literatureCaballeroandFarhi(XX)pointtothecollapseinsafe
assetsfollowingthe2008financialcrisisasimportantforunderstandingthedecline
inrealinterestrates,thedropinoutputandincreaseinriskpremiainequity
markets.Theexcessdemandforsafeassetsalsocallsforunconventionalmonetary
interventionssuchasthepurchasebythecentralbankoftoxicassetsasopposedto
moreconventionalpurchaseofsafetreasuries.
Whethertherecontinuestobealiquiditycrisisisupfordebate,howeverthereis
littledoubtthattheworldneedstobepreparedforfuturefinancialcrisisthatmay
arisefromChina.WithChina’sdebtexceeding240%ofGDPandtheongoingcredit
boomthereissufficientcauseforconcern.
AthemeinthepaperthatIhavespentlittletimediscussingisthe“PriceTheoryof
Money”.Guillermoarguesthatthereasonpeopleholdcertaincurrenciesisbecause
pricesdenominatedinthatcurrencytendtobepre-setandstaggeredandtherefore
deliverpredictableoutput.Thisisanappealingargumentbutofcourseonecould
askwhatcomesfirst.Thereasonpricesarestickyinacurrencyisplausiblybecause
ofthefaithinthemonetaryauthoritiesthatmanagethecurrencytokeepinflation
low.
IlookforwardtoreadingfutureworkbyGuillermoonthisandrelatedissuessoas
togainimportantinsightsintothefunctioningoftheworldeconomy,something
Guillermohasdeliveredinspadesoverthelastmanyyears.
5
References
1.Aguiar,Mark,ManuelAmador,EmmanuelFarhi,andGitaGopinath.2015.
“CoordinationandCrisisinMonetaryUnions.”QuarterlyJournalofEconomics130
(4):1727-1779.
2.Aguiar,Mark,ManualAmador,EmmanuelFarhi,andGitaGopinath.2013.“Crisis
andCommitment:InflationCredibilityandtheVulnerabilitytoSovereignDebt
Crises”.NBERWorkingPaper19516
3.Caballero,RicardoandEmmanuelFarhi.2014.“TheSafetyTrap”.NBERWorking
Paper19927.
6