The Legend


The proposed Covid-19 stimulus package in the US has reignited debate around inflation. Much contemporary concern and discussion on the topic still bears the mark of the 1970s, the Volcker disinflation, and the past consensus around the relationship between unemployment and inflation.

In a recent paper, Jonathon Hazell, Juan Herreño, Emi Nakamura, and Jón Steinsson find evidence that points instead to the determining role of expectations around future monetary policy.

From the paper:

“The episode in US economic history that has perhaps most strongly influenced the profession’s thinking regarding the slope of the Phillips curve is the Volcker disinflation. In the early 1980s, Paul Volcker’s Federal Reserve sharply tightened monetary policy. Unemployment rose sharply and inflation fell sharply. The conventional interpretation of this episode is that it provides evidence for a relatively steep Phillips curve. The insensitivity of inflation to changes in unemployment over the past few decades has led many economists to suggest that the Phillips curve has disappeared—or is ‘hibernating.’ During the Great Recession, unemployment rose to levels comparable to those during the Volcker disinflation, yet inflation fell by much less. The ‘missing disinflation’ during and after the Great Recession then gave way to ‘missing reinflation’ in the late 2010s as unemployment fell to levels not seen in 50 years, but inflation inched up only slightly. A similar debate raged in the late 1990s, when unemployment was also very low without this leading to much of a rise in inflation. Some have argued that the apparent flattening of the Phillips curve signals an important flaw in the Keynesian model.

An alternative to the standard narrative of the Volcker disinflation is that the decline in inflation was driven not by a steep Phillips curve but by shifts in beliefs about the long-run monetary regime in the United States that caused the rapid fall in long-run inflation expectations. Volcker’s monetary policy constituted a sharp regime shift that was imperfectly credible at the outset but became gradually more credible as time passed. This regime shift led to a large and sustained decline in long-term inflation expectations over the 1980s but also a transitory rise in unemployment. Perhaps it was this large change in inflation expectations that was the primary cause of the rapid fall in inflation over this period rather than high unemployment working through a steep Phillips curve.”

Link to the paper.

  • Employ America’s Skanda Amarnath and Alex Williams blog on “Inflation: the good, the bad, the transitory.” Link. And Tim Barker blogs on the present inflation discourse. Link.
  • “A puzzle emerges when Phillips curves estimated over 1960-2007 are used to predict inflation over 2008-2010: inflation should have fallen by more than it did.” Laurence Ball and Sandeep Mazumder analyze inflation after the Great Recession. Link. And James Stock and Mark Watson probe the question of inflation forecasting. Link.
  • Two recent Phenomenal World essays on the topic: Yakov Feygin on “The Deflationary Coalition” and Andrew Elrod on “Inflation, Specific and General.” Link, and link.


Public Works in Colonial Madras

Presidential Fellow in Environmental History at the University of Manchester ADITYA RAMESH studies infrastructure projects, city-building, and technocratic politics in the British colonial and postcolonial world. A recent paper examines the construction of large dams financed through state debt in 19th-century Madras.

From the paper:

“The nineteenth century witnessed a major expansion in the construction of public works including canals, roads, and railways across the British empire. The question that colonial governments faced during the nineteenth century was on how to finance public works. Irrigation-related public works projects were to be divided under two headings – ‘protective’ and ‘productive’. Protective works would be financed from current revenue, and were largely for undertaking systematic repairs and executing small projects. A project classified as ‘productive’ implied a large financial outlay, drawn through complex networks of loans from financial markets in London, including the Bank of England, and guaranteed by the government of India. Provincial governments would have to approach the government of India with plans for particular public works projects in order to obtain loans. Key to approval was financial viability. Technical plans made by engineers would have to guarantee certain returns from a project, typically within ten or twenty years, depending on the project. In other words, projects would have to be self-financing, not immediately, but in the future. This category of ‘productive works’ – a way in which the economic potential of rivers could be harnessed through technology and finance – was profoundly important for the rise of the large dam as a state-led enterprise. The article argues that at the heart of the large dam, therefore, was a more fundamental relationship between the expansion of Victorian capital, contingent events such as the famine, and natural resources in the colonies.”

Link to the paper, link to Ramesh’s website.

Each week we highlight great work from a graduate student, postdoc, or early-career professor. Have you read any excellent research recently that you’d like to see shared here? Send it our way:

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  • “Little by little, we’ve reduced public expenditure beyond the point which enabled the continuation of social rights, to the point where it has deteriorated them.” In PW’s “Market Economy, Market Society,” an interview with former Prime Minister of Italy Giuliano Amato. Link.
  • Also from the book, an interview with trade unionist and former PCI politician Emanuele Macaluso, and an interview with former president of Italian broadcast network RAI Claudio Petruccioli. Link, link.
  • “Virginia school neoliberalism is less an argument against taxation than an argument in favor of regressive forms of taxation that are rarely acknowledged as such—user fees, fines, and flat-rate levies.” Melinda Cooper on tax revolts. Link.
  • Belinda Archibong. Brahima Coulibaly, and Ngozi Okonjo-Iweala on Washington Consensus reforms and economic performance in Sub-Saharan Africa. Link.
  • “Spending and job finding facts suggest that benefit expansions during the pandemic were a more effective policy than predicted by standard structural models.” Peter Ganong et al. on the effects of expanded unemployment insurance. Link.
  • Kaiji Chen, Qing Wang, Tong Xu and Tao Zhahina on the distributional impacts of China’s loan-to-value program and 2014-16 mortgage boom. Link.
  • “We develop a theory of state formation shedding light on the rise of the first stable state institutions in Bronze Age Mesopotamia.” By Giacomo Benati and Carmine Guerriero. Link.
  • Pilar Nogues-Marco measures colonial extraction during the East India Company’s rule from 1757 to 1858. Link.
  • Massimiliano Ferraresi and Gianluca Gucciardi investigate how municipal government party affiliation shifts perceptions of central government responses to Covid-19 in Italy. Link.
  • Ann Varley and Clara Salazar examine periurban housing production resulting from the privatization of Mexican state-owned lands. Link.
  • “What is the impact of transport infrastructure access on economic development? This article takes the research question to a more micro level using a unique dataset constructed from Bangkok household-level orchard land deeds/tax records from the 1880s. Not only does the rare dataset provide an approximation of labor productivity, it also provides detailed property characteristics allowing us to determine whether households had access to transport networks. We can reasonably conclude with some degree of confidence that compared to inland properties, properties with direct access to canals had labor productivity gains of about 10.7 percent. These productivity increases are non-negligible and translate into real welfare gains for households with direct access to the canal network.” By Thanyaporn Chankrajang and Jessica Vechbanyongratana. Link.

Each week we highlight research from a graduate student, postdoc, or early-career professor. Send us recommendations:

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