Be Wary of Simple Policy Rules
As the economy has strengthened over the past few years but core inflation remains stuck well below 2 percent, research has sought to shed light on why inflation has not necessarily moved in the direction or to the magnitude predicted by traditional models centered on resource slack. Similarly, inflation was remarkably stable during the past downturn, declining less than many models would have predicted, which was largely pinned on well-anchored inflation expectations.Simon Gilchrist and Egon Zakrajšek offer evidence that it is not solely resource slack and inflation expectations that influence inflation.2 Financial conditions also play a role as financially stressed firms and industries more reliant on external financing are less apt to reduce prices in downturns in order to preserve cash flow. The result is more modest disinflationary pressure than would be expected based on demand and slack conditions alone. To that end, monetary policy should be wary of using a specific interest-rates rule when financial conditions may be affecting firms’ pricing behavior. Following financial shocks, policymakers should focus more heavily on stabilizing output as “rules that put a great deal of weight on inflation stabilization lead to significantly worse economic outcomes.”
Recommended Content
Editors’ Picks
EUR/USD clings to daily gains above 1.0650
EUR/USD gained traction and turned positive on the day above 1.0650. The improvement seen in risk mood following the earlier flight to safety weighs on the US Dollar ahead of the weekend and helps the pair push higher.
GBP/USD recovers toward 1.2450 after UK Retail Sales data
GBP/USD reversed its direction and advanced to the 1.2450 area after touching a fresh multi-month low below 1.2400 in the Asian session. The positive shift seen in risk mood on easing fears over a deepening Iran-Israel conflict supports the pair.
Gold holds steady at around $2,380 following earlier spike
Gold stabilized near $2,380 after spiking above $2,400 with the immediate reaction to reports of Israel striking Iran. Meanwhile, the pullback seen in the US Treasury bond yields helps XAU/USD hold its ground.
Bitcoin Weekly Forecast: BTC post-halving rally could be partially priced in Premium
Bitcoin price shows no signs of directional bias while it holds above $60,000. The fourth BTC halving is partially priced in, according to Deutsche Bank’s research.
Week ahead – US GDP and BoJ decision on top of next week’s agenda
US GDP, core PCE and PMIs the next tests for the Dollar. Investors await BoJ for guidance about next rate hike. EU and UK PMIs, as well as Australian CPIs also on tap.