Deflationary Process Research Articles

Self-fulfilling deflations

What types of monetary and fiscal policy rules produce self-fulfilling deflationary paths that are monotonic and empirically relevant? This paper presents simple theoretical conditions that guarantee the existence of these paths in a general equilibrium model with sticky prices. These sufficient conditions are weak enough to be satisfied by most monetary and fiscal policy rules. A quantification of the model which combines a real shock à la Hayashi and Prescott (2002) with a simultaneous sunspot that deanchors inflation expectations matches the main empirical features of the Japanese deflationary process during the “lost decade”. The results also highlight the key role of the assumption about the anchoring of inflation expectations for the size of fiscal multipliers and, in general, for any policy analysis.

Population Ageing and Inflation with Endogenous Money Creation

This paper provides an explanation as to why population ageing is associated with deflationary processes. For this reason we create an overlapping-generations model (OLG) with money created by credits (inside money) and intergenerational trade. In other words, we combine a neoclassical OLG model with post-Keynesian monetary theory. The model links demographic factors such as fertility rates and longevity to prices. We show that lower fertility rates lead to smaller demand for credits, and lower money creation, which in turn causes a decline in prices. Changes in longevity affect prices through real savings and the capital market. Furthermore, a few links between interest rates and inflation are addressed, they arise in the general equilibrium and are not thoroughly discussed in literature. Long-run results are derived analytically; short-run dynamics are simulated numerically.

Economics of soil degradation and sustainable use of land in danger of wind erosion

Soil degradation has been identified as one of the major threats to European soils. This article describes the conditions under which wind erosion of soils occurs in Ukraine and the potential soil loss caused by this problem. The purpose of this paper is to find the best option, from both an economic and an environmental point of view, to conserve and restore soil productivity on the land suffering from and at risk of wind erosion. Losses of humus and nutrients from the soil through deflation have been calculated for the districts of Volyn in 1999–2009, and ecological and economic damage from the loss of soil through deflation has been identified for Volyn district and the village of Pichcha. Three options to mitigate and compensate for the losses of organic matter and nutrients on the affected lands are assessed for the comparative effectiveness of the measures in the Pichcha village, Shatsky district, Volyn region during 2008–2012. In these sites, the research identified that the best measure against soil deflation as changing the economic use of lands at risk of soil erosion by wind. In particular, the halting of cattle grazing and the creation of overseeding grass meadows. This options has a number of advantages, including: the cultivation of perennial grasses generates income from the sale of seed clover in the first year and hay for following four years; through nitrogen fixing bacteria associated with the annual grasses improving nitrogen levels in the soil; and, through halting the deflationary processes in the different soil types in the investigated areas and allowing for the steady build up of a fertile humus layer.

La arquitectura de la eurozona y la crisis de su periferia

This research analyses the underlying causes of the Eurozone periphery's economic crisis and suggests an economic policy package not only to restore short-term economic growth, but also to make it sustainable in the long term. Policy recommendations to strengthen economic growth and speed up structural reforms are based on an in-depth examination of the vulnerabilities created by the Eurozone's institutional design and aggravated by the recent US financial crisis. As shall be shown, the inconsistency between the Eurozone's architecture and the economic features of some participating nations was responsible for the noticeable fiscal imbalances and international competitiveness differentials within the region. The difficulties to bring down the public debt value and to improve the fiscal performance in the Eurozone's periphery, in addition to the undergoing deflationary process, have also resulted from the introduction of the common currency and the macroeconomic policy changes brought about by it. In this perspective, important changes are suggested to the Eurozone's institutional framework in order to positively affect international competitiveness, government finances and the health of financial institutions.

Deflation Expectations and Japan's Lost Decade

Starting from the early 1990s, GDP in Japan stagnated for about a decade while inflation has been persistently low, at times even negative. This paper provides new stylized facts about the Japanese deflationary process and puts these facts into the context of the literature addressing the origins of the Japanese "lost decade". In order to properly understand the evolution of inflation in Japan and the role of monetary and fiscal policy, a crucial question is whether the deflationary process, a phenomenon specific only to Japan during the period under consideration, was anticipated by agents. The paper suggests a positive answer to the question. In particular, I show that once a "global" inflation forecasting error, common across advanced countries, is removed from Japanese inflation expectations, then the remaining "idiosyncratic" inflation forecasting error is close to zero at various forecasting horizons. This indicates that the Japan-specific deflationary process was fully anticipated by agents, with medium-term (and "idiosyncratic") inflation expectations disanchoring very soon along the deflationary path.

Why Paul Krugman Lost His Temper with the Swedish Riksbank?

Paul Krugman recently attacked the Swedish Riksbank for its monetary policy that it has caused a deflationary process because it raised its key interest rate in 2010 and 2011 and by this triggered unnecessarily a deflationary process afterwards. He used the term sadomonetarist for this kind of policy. This response on his accusation of the author of this paper is that Krugman has overdone his challenge of the monetary policy of the Riksbank. He has not looked sufficiently at the empirical facts of the past development in Sweden. In particular at the real GDP growth and the inflation performance it was from the standard approach reasonable to increase interest rates in Sweden after a very strong rebound of Swedish growth in 2010 with 6,6% and further strong economic growth afterwards. Inflation predictions have never been a simple problem due to the multitude of channels through which monetary policy influences economic development. Therefore it is always easy afterwards to claim that policy makers should have done better. However, this is only true ex post by ignoring the uncertainty about the future. Furthermore Sweden has experienced a significant deceleration of its inflation rate, i.e. disinflation, but not deflation for a couple of years. This might, however, be caused by external factors like a global slowdown in economic growth and a recession in the Euro area in particular. If unforeseen by the Swedish Riksbank probably due to overoptimistic forecasts of the EU-Commission, this is caused by a forecasting error, but it is not caused by a monetary policy error. A deflationary spiral is even now not in sight in Sweden. The risk of a global deflation has its origins elsewhere in the global economy.

International migration by 2030: impact of immigration policies scenarios on growth and employment

Purpose–The aim of this paper is to estimate the dynamic of international migration between the different regions of the world for 2030 and to measure the impact of different kind of migration policies on the economic and social evolution.Design/methodology/approach–The change and migration forecasting are estimated for regions of the world using macroeconomic Cambridge Alphametrics Model.Findings–The crisis and its aggravation thus clearly favour scenarios of immigration policy along the “zero migration” or “constant migration”. These choices of migration policies reinforce the deflationary process resulting in reduced opportunities for renewed growth in industrial areas and are not offset by the dynamism of growth in emerging countries. Paradoxically, the developed countries which are most durably affected by the crisis are also those that have ageing population and are in high need of skilled and unskilled labor.Practical implications–Three options are possible: one going along the depressive process by espousing restrictive immigration policies that remain expensive. The second involves a highly selective immigration policy. Under these conditions the demographic revival already appearing would be reinforced by a rejuvenation of the population brought about by a more open immigration policy. Political and institutional factors play a fundamental role in the emergence of this optimistic assumption and the rise of isolationism in Europe and the ghettoization of suburban areas can hinder the application of such a policy of openness to migration. The third scenario, the mass migration scenario, allows letting go of the growth related constraints and getting out of the deflationist spiral. This pro-active approach could cause public opinions to change in line with public interest. This scenario of mass migration has more of a chance to see the light under a growth hypothesis. However, restrictive policies weaken the prospects of sustainable recovery causing a vicious cycle that can only be broken by pro-active policies or by irresistible shocks.Originality/value–From specific estimations, four immigration regimes have been built that cut across the major regions of the model: the “core skill replacement migration regime” based on selective policies using migration to fill high-skilled labor needs (United Kingdom, West and Northern Europe, Canada, Australia, and USA), “mass immigration and replacement” applies to South Europe, East Asia High Income, and part of West Asia (Gulf countries), “big fast-growing emerging regions of future mass immigration,” notably China, India and “South-South migration” based on forced migration much of it by climate change, which may likely occur in South Asia, part of West Asia, and, most of Africa (without South Africa). Migrations in transit countries (Central America to USA, and East Europe to UK and West Europe) are based on low skilled migrants in labor-intensive sectors.

Repairing a Mortgage Crisis: HOLC Lending and Its Impact on Local Housing Markets

Between 1933 and 1936 the Home Owners’ Loan Corporation purchased more than a million delinquent mortgages from private lenders and refinanced those loans for the borrowers. Its primary goal was to break the cycle of foreclosure, forced property sales and decreases in home values that was affecting local housing markets throughout the nation. We find that the volume of HOLC lending was related to measures of distress in local (county-level) housing markets and that these interventions increased 1940 median home values and homeownership rates, but not new home building.“[A] tremendous surge of residential building in the [last] decade… was matched by an ever-increasing supply of homes sold on easy terms [and only]… a small decline in prices was necessary to wipe out this equity. Unfortunately, deflationary processes are never satisfied with small declines in values. They feed upon themselves and produce results out of all proportion to their causes… In the field of real estate finance, particularly, we have depended so much upon credit that our whole value structure can be thrown out of balance by relatively slight shocks. When such a delicate structure is once disorganized, it is a tremendous task to get it into a position where it can again function normally.”1Henry Hoagland, 1935

Deflation and investment activities of banks. The case of Japan in the years 1993-2008

The purpose of the article is to identify determinants of investment activities of banks during deflationary process. Japanese experience suggests that the processes of long-term deflation have a substantial impact on the structure of assets and liabilities of banking institutions. In conditions of deflation and 'liquidity trap', classic, deposit-credit activities of banks do not produce adequate profits. As a result it influences negatively bank’s profitability. In this situation banks tend to look for other sources of revenue such as commissions and investment activities. Article shows causes and effects of changes in banks' balance sheets. It is also an attempt to answer the question whether there are possibilities to build an investment portfolio that help to avoid the negative effects of deflation processes.

Price Flexibility and Debt Dynamics in a High Order AS-AD Model

In this paper we reconsider extensions and modifications of earlier work on a disequilibrium model of AS-AD growth. Our dynamic model exhibits more or less sluggishly adjusting prices and quantities, Keynesian demand rationing and fluctuating capacity utilization for both labor and capital. Firms use debt (and pure profits) to finance their investment expenditures. We first prove that the resulting 7D core dynamics are convergent (broadly speaking) for low adjustment speeds. We then demonstrate partly analytically and partly numerically that their interior steady state will lose asymptotic stability by way of Hopf bifurcations when relevant adjustment speeds are made sufficiently large. This holds in particular for debt deflation, where falling price levels (caused by price flexibility that is sufficiently high) cause significantly increasing real debt, falling investment and shrinking economic activity. This deepens the deflationary process already under way. Such an instability result even occurs in the case where accompanying real wage increases would support economic stability.

Deflation and matter creation

A nonsingular deflationary cosmology driven by adiabatic matter creation is proposed. The model evolves continuously from an initial de Sitter spacetime towards a slightly modified Friedman–Robertson–Walker universe. The horizon and flatness problems of the standard model are solved, but there is no supercooling and subsequent reheating as in standard inflation since entropy generation is concomitant with the deflationary process. Due to persistent adiabatic matter creation, the universe can be substantially older than 10 Gyr as predicted by the flat FRW model.

Stable isotope studies and the hydrological regime of sabkhas in southern Kuwait, Arabian Gulf

The marine sabkhas in Al-Khiran, Kuwait were formed by sedimentary offlap and relative fall in sea level since the last Holocene transgressive maximum ∼ 4500–4700 years BP. In the absence of significant marine flooding of the coastal sabkhas today (due to the presence of chenier ridges), their hydrological regime is almost entirely controlled by sub-surface continental groundwater influx. This topographic-hydrologic framework is also reflected in the isotopic data, and to some extent in the chemistry of the groundwaters, where the major ions show a steady evaporative concentration from inland to coast and from coast to sabkha, with a “high” chloride plateau in the central parts of the marine sabkha. Monitoring of the groundwater table (GWT) over a three-year period indicates that: (a) when the GWT depths are < 1.2 m, the sabkha is in a state of depositional equilibrium; (b) GWT fluctuations (due to drawdown or recharge) exceed 0.5 m yr −1; and (c) calculations based on measured fall in GWT levels, porosities of the sediments and the volume of anhydrite formed in the sabkha suggest that in the last 4700 years since progradation commenced, only about 2–4 cm yr −1 (net) of groundwater is lost from the sabkha surfaces—a surprisingly low rate for this arid region. This is interpreted as due to recharge of the marine sabkha (hosted by marine sediments) by significant lateral flow of continental groundwater from the regional system—a process that maintains long-term stability of the sabkhas and without which deflationary processes would dominate. The oxygen and deuterium isotopic compositions of the marine and continental sabkha waters form a group ( δ 18 O=0 ± 2‰ ; δD = − 10 ± 7‰) isotopically distinct from local meteoric water and Pleistocene formation waters. They represent evaporation of the old formation waters, with a characteristic increase in the heavier isotopes. Only sabkha waters in areas of tidal flooding (the narrow creek areas) can be shown to be evaporated seawater. The δ 18 O and δD values of the residual brine increase to about +6‰ and +23‰, respectively, when they reverse and are arrested at the halite precipitation point. Only a minor amount of mixing between these two evaporated waters could take place. Isotopic analyses of sulphur and oxygen in dissolved sulphate of sabkha waters and precipitated mineral sulphate confirm a minor contribution of seawater sulphate ( δ 34 S = +19 ± 2‰ ; δ 18 O = + 11‰ ) in the tidal areas, but show that the bulk of the marine sabkha water sulphate ( δ 34 S = + 14 ± 2‰ ; δ 18O + 14 ± 1%.) and coexisting sulphate minerals is dominantly of continental origin. At Al-Khiran, Gulf of Sirte (Libya) and in Abu Dhabi (United Arab Emirates), δ 34S values of sabkha sulphate decrease to +14‰ on the landward side: close to the values between + 13 and + 16‰ for continental sabkhas and continental getch (gypsum). This pervasive homogeneous sulphate source may be recycled particulate sulphate distributed by major dust storms. These results have important implications in evaporite sedimentology.

Endettement et développement : quelques leçons de la crise actuelle

From the viewpoint of «repayment constraints», Third-World indebtedness is leading to extroverted productive structures. Whatever the cost, in terms of development, for a debtor country fulfilling its obligations, the policy of developed countries objecting to increase of their own trade deficits has led to the failure of the «international credit economy», as well as their objecting to debt moratoriums, has given way from such an economy into an «international indebtedness economy». This has been shaping, though on a temporary basis, the «pattern» of North-South relationships for all its fundamentally unsteady status and the risk it could generate a generalized deflationary process.

Monetary Analysis in Italy

(3) If, however, the public uses the released funds for financing new expenditure, such borrowing will indeed be indicative of an inflationary process. The origin of the inflationary impulse must then be attributed to the private sector of the economy. (4) Borrowing by the Treasury from the commercial banking system for the purpose of financing expenditure has, by itself, exactly the same inflationary character as borrowing from the central bank. (5) Borrowing by the Treasury from the public by issue of short-term debt for the purpose of financing expenditure can be actually, and is at least potentially, of an inflationary character. Such borrowing can fundamentally be justified only if serving to counteract the undesirable deflationary effects of spontaneous hoarding in the private sector of the economy. Mr. Chairman, I am very grateful to you that you have taken the initiative for this panel discussion and that you have been so kind as to ask me to tell this illustrious gathering something about the methods the Nederlandsche Bank has been using to unravel the mystery of inflationary and deflationary developments. I do not claim that this method gives any final answer to the problem. I do believe, however, that it can be instrumental in attaining a better understanding of the strictly monetary aspects of the inflationary and deflationary process. Thus it may, perhaps, be helpful to both central banks and treasuries in better adapting their policies to fighting that curse of slow but persistent inflation that seems to be upon our present day world and to the lifting of which all our efforts should be dedicated.