Henry Curr on Inflation, the Phillips Curve, and A New Monetarism

Episode Summary

Executive Summary: The conversation examines why inflation has stayed persistently below target across much of the world despite strong labor markets and aggressive central banks. Kerr argues the story is both long-term—successful inflation targeting—and short-term—Phillips curve breakdown, global forces, and measurement issues. He closes by advocating more radical reforms, including average inflation targeting, nominal GDP level targeting, and stronger fiscal-monetary coordination.

Main Topics: The global low-inflation puzzle (Priority: 5/5): Kerr explains that low inflation is not just a U.S. or euro-area issue but a broad international phenomenon affecting advanced and many emerging economies, raising questions about what has changed in the global macro environment. Why low inflation matters (Priority: 5/5): He lays out three costs: weaker-than-necessary growth from insufficient stimulus, damaged central bank credibility and distorted contracts, and the risk of falling into a low-rate, low-inflation trap when expectations drift down. The Phillips curve under strain (Priority: 5/5): The discussion centers on why the traditional unemployment-inflation relationship has appeared to fail both after the financial crisis and during today’s tight labor markets, prompting debate over whether the curve is broken or simply obscured. Technology and measurement (Priority: 4/5): The exchange explores whether digital services, Amazon, and free online products are suppressing measured inflation by lowering prices or by creating large unmeasured consumer surplus and productivity gains. Global factors and safe-asset demand (Priority: 5/5): Kerr emphasizes cross-border influences such as global saving gluts, demand for safe liquid assets, integrated capital markets, and commodity prices as major drivers of inflation synchronization. Policy reform: a new monetarism (Priority: 5/5): The final section proposes deeper reforms: make-up policy through average inflation or price-level targeting, nominal GDP level targeting, and some form of fiscal-monetary backstop to escape the zero lower bound.

Key Arguments: Inflation targeting and central bank independence largely solved the old high-inflation problem over the long run, but the last decade has produced a new problem of persistent undershooting. Low inflation is costly because it can signal insufficient monetary stimulus, weaken the credibility of inflation targets, and increase the risk of secular stagnation or liquidity traps. The Phillips curve may not be dead, but it is behaving poorly; explanations include identification problems, anchored expectations, nonlinearities, and global shocks. Technology likely contributes to lower measured inflation and may mean actual inflation is even lower than the statistics show, though it is unlikely to be the main driver of the shortfall. A global factor is important because inflation moves in sync across countries, especially when commodity prices and capital markets are under pressure. The rise in demand for safe, liquid assets and the global savings glut help explain the worldwide decline in real interest rates and the difficulty of reaching inflation targets. Central banks may need more aggressive make-up strategies because average inflation targeting alone may not be enough to restore room to cut rates in future downturns. Nominal GDP level targeting is attractive because it integrates real growth and inflation into one metric and avoids some of the uncertainty inherent in estimating slack. Fiscal policy must be part of the framework because monetary policy alone may not overcome the zero lower bound; automatic stabilizers or helicopter-money-style mechanisms may be needed.

Data Points: Inflation targeters below target/low end: 28 of 43 - Share of inflation-targeting central banks whose inflation was below target or at the low end of the target range. Inflation-targeting world below target by GDP: 91% - By GDP, the vast majority of the inflation-targeting world was running below target. Advanced economies at record employment highs: About two-thirds of OECD countries - In the rich world, a record proportion of the working-age population had jobs. U.S. unemployment rate: Lowest since the late 1960s - Used to illustrate how tight labor markets still did not generate expected inflation. Global factor explanation share: 50% - The transcript cites a World Bank-related study suggesting a global trend accounts for about half of U.S./advanced-economy inflation variation on average. Global factor explanation share in poor countries: About one-third - The same study indicates the global component explains roughly a third of inflation variation in poorer countries. Emerging markets in undershoot discussion: About half - Roughly half of emerging-market inflation targeters were also undershooting or at the low end of their target ranges.

Pivotal Quotes: "Today, the lethal assassin has gone missing." — David Beckworth quoting Henry Kerr's article: Opening framing on the historical reversal from high inflation fear to low inflation concern. "There are three costs that I set out in the article." — Henry Kerr: Introduces his core case for why low inflation is a serious macroeconomic problem. "inflation isn't a monetary phenomenon anymore. We may as well sort of give up. And I think that's wrong, too." — Henry Kerr: He rejects both the view that nothing has changed and the view that inflation should be abandoned as a policy objective.

Implications: Listeners should expect more debate over monetary frameworks: average inflation targeting may be only a first step, while nominal GDP targeting and fiscal backstops could become necessary if low inflation, weak slack signals, and the zero lower bound persist.