From Chronic Inflation to Chronic Deflation Discussant: Gita - PowerPoint PPT Presentation

From Chronic Inflation to Chronic Deflation Discussant: Gita Gopinath Harvard University 1

Highlights 2

Highlights Blind Spots: 1. Expectations driven crises 2. “Liquidity” crises 2

Highlights Blind Spots: 1. Expectations driven crises 2. “Liquidity” crises Policy: 1. Ensure sufficient “liquid/safe assets” 2. Global coordination of policy 2

Expectations Crises: Draghi Put 3

Policy Implications 4

Policy Implications Does ability to inflate reduce exposure to roll- over crises? 4

Policy Implications Does ability to inflate reduce exposure to roll- Not necessarily over crises? 4

Policy Implications Does ability to inflate reduce exposure to roll- Not necessarily over crises? Should monetary policy play an active role in debt crises? 4

Policy Implications Does ability to inflate reduce exposure to roll- Not necessarily over crises? Should monetary policy play an active role in Yes debt crises? 4

Policy Implications Does ability to inflate reduce exposure to roll- Not necessarily over crises? Should monetary policy play an active role in Yes debt crises? Aguiar, Amador, Farhi and Gopinath (2014) Crisis and Commitment: Inflation Credibility and the Vulnerability to Self-fulfilling debt crisis Coordination and Crises in a Monetary Union 4

Policy Implications Does ability to inflate reduce exposure to roll- Not necessarily over crises? Should monetary policy play an active role in Yes debt crises? Aguiar, Amador, Farhi and Gopinath (2014) Crisis and Commitment: Inflation Credibility and the Vulnerability to Self-fulfilling debt crisis Coordination and Crises in a Monetary Union 4

Liquidity Crises Safe Asset Unconventional Policy Supply - Buy toxic assets (trillions of $) - Increase government debt 21 - Forward guidance weak 15.75 10.5 5.25 Unsavory Spillovers - Search for other “safe assets” 0 2007 2011 Caballero and Farhi (2014) 5

Is there still a Liquidity Crisis? 6

Is there still a Liquidity Crisis? Stein 2013 (for the U.S) 6

Is there still a Liquidity Crisis? Stein 2013 (for the U.S) Rising private-sector debt 6

Is there still a Liquidity Crisis? Stein 2013 (for the U.S) Rising private-sector debt Narrowing spreads between risk-free T reasuries and corporate bonds 6

Is there still a Liquidity Crisis? Stein 2013 (for the U.S) Rising private-sector debt Narrowing spreads between risk-free T reasuries and corporate bonds growing proportion of corporate debt going to riskier companies 6

Is there still a Liquidity Crisis? Stein 2013 (for the U.S) Rising private-sector debt Narrowing spreads between risk-free T reasuries and corporate bonds growing proportion of corporate debt going to riskier companies Caballero and Farhi (2014): High excess returns in stock market 6

Is there still a liquidity crisis? • T rend Vs Cycle • Demographics • Slowing productivity 7

Global Headwinds 8

T ake Aways 9

T ake Aways 1. “Liquidity” scarcity has grave consequences 9

T ake Aways 1. “Liquidity” scarcity has grave consequences 9

T ake Aways 1. “Liquidity” scarcity has grave consequences 2. Unconventional policies here to stay 9

T ake Aways 1. “Liquidity” scarcity has grave consequences 2. Unconventional policies here to stay • Create more safe assets 9

T ake Aways 1. “Liquidity” scarcity has grave consequences 2. Unconventional policies here to stay • Create more safe assets 9

T ake Aways 1. “Liquidity” scarcity has grave consequences 2. Unconventional policies here to stay • Create more safe assets 3. Need a globally coordinated plan for the next liquidity crisis…which may be sooner than you think. 9

T ake Aways 1. “Liquidity” scarcity has grave consequences 2. Unconventional policies here to stay • Create more safe assets 3. Need a globally coordinated plan for the next liquidity crisis…which may be sooner than you think. 9

T ake Aways 1. “Liquidity” scarcity has grave consequences 2. Unconventional policies here to stay • Create more safe assets 3. Need a globally coordinated plan for the next liquidity crisis…which may be sooner than you think. 4. Methodology: Rational Expectations 9

T ake Aways 1. “Liquidity” scarcity has grave consequences 2. Unconventional policies here to stay • Create more safe assets 3. Need a globally coordinated plan for the next liquidity crisis…which may be sooner than you think. 4. Methodology: Rational Expectations • Don’t throw out the baby with the bath water. 9

T ake Aways 1. “Liquidity” scarcity has grave consequences 2. Unconventional policies here to stay • Create more safe assets 3. Need a globally coordinated plan for the next liquidity crisis…which may be sooner than you think. 4. Methodology: Rational Expectations • Don’t throw out the baby with the bath water. 9

T ake Aways 1. “Liquidity” scarcity has grave consequences 2. Unconventional policies here to stay • Create more safe assets 3. Need a globally coordinated plan for the next liquidity crisis…which may be sooner than you think. 4. Methodology: Rational Expectations • Don’t throw out the baby with the bath water. 9