Tilting at Windmills: Bernanke and Blanchard’s Obsession with the Wage-Price Spiral

Prof Servaas Storm of Delft University of Technology in this INET working paper:

Bernanke and Blanchard (2023) use a simple dynamic New Keynesian model of wage-price determination to explain the sharp acceleration in U.S. inflation during 2021-2023. They claim their model closely tracks the pandemic-era inflation and they confidently conclude that “… we don’t think that the recent experience justifies throwing out existing models of wage-price dynamics.” This paper argues that this confidence is misplaced. The Bernanke and Blanchard is another failed attempt to salvage establishment macroeconomics after the massive onslaught of adverse inflationary circumstances with which it could evidently not contend. It misrepresents American economic reality, hides distributional issues from view, de-politicizes (monetary and fiscal) policy-making, and sets monetary policymakers up to deliver significantly more monetary tightening than can be justified on the basis of more realistic model analyses.

India’s Foreign Exchange Reserves in High Volatility Episodes – An Empirical Assessment

Saurabh Nath, Dipak R. Chaudhari, Vikram Rajput and Gaurav Tiwari in this RBI Bulletin (Apr 24) article:

This article analyses the trend in India’s foreign exchange (FX) reserves during major high volatility episodes viz., Global Financial Crisis, Eurozone debt crisis/ Taper Tantrum, EME outflows/ US-China trade war and the recent Russia-Ukraine conflict / monetary policy tightening in the US. The article empirically examines major underlying factors impacting variation in FX reserves such as US Dollar Index (DXY), oil prices, foreign portfolio flows, US financial conditions and market volatility.

Highlights:

• • During the recent Russia-Ukraine conflict/ Federal Reserve tightening episode, exchange rate management and reserves faced strong headwinds from DXY, oil prices, foreign portfolio outflows and tight US financial conditions.
  • An autoregressive distributed lag (ARDL) model results show that the severity of these factors was the highest in the Russia-Ukraine conflict / Fed monetary policy tightening episode vis-à-vis the previous high volatility episodes.
  • The Reserve Bank, however, has managed to contain INR volatility and keep FX markets largely stable in all high volatility episodes. Importantly, INR’s implied volatility has remained one of the lowest amongst major EME peer as well as select AE currencies during Russia-Ukraine/Fed tightening episode, despite unprecedented headwinds witnessed during this period.

 

Trust in the European Central Bank – insights from the Consumer Expectations Survey

Ferdinand Dreher of ECB in this article looks at people’s trust in the central bank

On aggregate, according to the Eurobarometer, trust in the ECB held up relatively well during the pandemic and in the period of heightened inflation thereafter. Average trust across euro area countries declined significantly during the global financial crisis and the sovereign debt crisis, but slowly recovered afterwards (Chart 1). In the latest Eurobarometer survey, conducted in October and November 2023, 43% of euro area respondents expressed trust in the ECB, while 42% said they did not trust the institution and 15% answered that they did not know. Net trust in the ECB, defined as the percentage share of respondents that “tend to trust” the ECB minus the percentage share of respondents that “tend not to trust” the ECB, was thus marginally positive. After having increased from 2020 to mid-2021, it declined into negative territory in early 2022 and recovered to pre-pandemic levels thereafter.^[7] This relative stability has persisted despite high inflation being cited as a main concern by survey respondents since 2021, as well as unprecedented global tensions.