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A digital Nixon shock?
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Good inflation
Jun 05,2021 - Last updated at Jun 05,2021
PRINCETON In response to recent concerns about resurgent inflation, US policymakers deny that there is any threat and insist that expectations are “well anchored”. Any recent price spikes, they argue, will prove temporary, arising from one-off shortages that will be resolved when life returns to normal after the pandemic. Nonetheless, market participants and investors are increasingly obsessed with the issue and pundits are rancorously divided, with some denouncing those with whom they disagree as “cockroaches”.
Such rhetoric suggests a need to step back and think about what is meant by inflation and its opposite, deflation. Not all inflations or deflations are alike. Price declines (deflation) driven by technical improvements can be good, as in the case of electrical motors or chemical dyes in the late nineteenth century, or of computers (and many other electronic consumer goods) over the past 50 years. These are
Abstract
Using business survey data on German manufacturing firms, this paper provides tests for hypotheses formulated in capital market imperfection theories that predict distributional effects in the transmission mechanism of monetary policy. Effects of monetary policy shocks on the business conditions of firms of several size classes are analysed, with the finding of considerable asymmetry. As predicted by theory, small firms are affected more strongly than large firms. To test whether these effects are reinforced when the economy is in a business cycle downturn, the paper employs a new estimation strategy: impulse response analysis conditional on Markov-switching regimes. The findings are supportive of the theoretical hypotheses: in a business cycle downturn, the distributional effects of monetary policy transmission are indeed reinforced.
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