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ECB Forum on Central Banking, June 2018 1 16-18 June 2018 · Sintra Portugal Price and wage-setting in advanced economies 18-20 June 2018 Sintra • Portugal Conference proceedings PRICE AND WAGE-SETTING IN ADVANCED ECONOMIES PROGRAMME Contents Programme 3 Price and wage-setting in advanced economies: takeaways from the ECB’s 2018 Sintra Forum 6 By Philipp Hartmann and Peter McAdam Monetary policy in a low inflation, low interest rate world 27 Dinner speech by Lawrence H. Summers Monetary policy in the euro area 33 Introductory speech by Mario Draghi, President of the ECB Slack and Cyclically Sensitive Inflation 41 By James H. Stock and Mark W. Watson Comment on “Slack and Cyclically Sensitive Inflation” by James H. Stock and Mark W. Watson 80 By Lucrezia Reichlin Inflation Expectations – a Policy Tool? 93 By Olivier Coibion, Yuriy Gorodnichenko, Saten Kumar and Mathieu Pedemonte Comment on “Inflation Expectations – a Policy Tool?” by Olivier Coibion, Yuriy Gorodnicheko, Saten Kumar and Mathieu Pedemonte 152 By Ricardo Reis The Case of the Disappearing Phillips Curve 164 By James Bullard Fixing the Astrolabe: Global Factors and Inflation Models 170 By Kristin Forbes The Macroeconomics of Price and Wage-Setting 187 By Philip R. Lane Learning from stubborn inflation 190 By Charles Wyplosz Measuring inflation in the modern economy – a micro price-setting view 196 By Aviv Nevo and Arlene Wong Comment on “Measuring inflation in the modern economy – a micro price-setting view” by Aviv Nevo and Arlene Wong 199 By Michael Weber Productivity Growth, Wage Growth and Unions 215 By Alice Kügler, Uta Schönberg and Ragnhild Schreiner ECB Forum on Central Banking, June 2018 1 Comment on “Productivity Growth, Wage Growth and Unions” by Alice Kügler, Uta Schönberg and Ragnhild Schreiner 248 By Michael C. Burda Reflections on wage-setting 261 By Klaus F. Zimmermann Views on advanced economy price and wage-setting from a reformed central bank researcher and national statistician 267 By Erica L. Groshen Wage dynamics and labour market institutions 285 By Philippe Marcadent Concentration in markets: trends and implications for price-setting 292 By Tommaso Valletti ECB Forum on Central Banking, June 2018 2 Programme Monday, 18 June 18:30 Opening reception and dinner Opening remarks Mario Draghi, President, European Central Bank Dinner hosted by the Executive Board of the European Central Bank Dinner speech Monetary policy in a low inflation, low interest rate world Lawrence H. Summers, Professor and President Emeritus of Harvard University, former US Secretary of the Treasury Speech Tuesday, 19 June 9:00 Introductory speech Mario Draghi, President, European Central Bank Speech 9:30 Session 1 Macroeconomics of price and wage-setting Chair: Peter Praet, Member of the Executive Board, European Central Bank Slack and cyclically sensitive inflation James H. Stock, Professor, Harvard University (with Mark Watson, Professor, Princeton University) Paper/Presentation Discussant: Lucrezia Reichlin, Professor, London Business School Paper/Presentation Inflation expectations – a policy tool? Yuriy Gorodnichenko, Professor, University of California, Berkeley (with Olivier Coibion, Associate Professor, University of Texas at Austin; Saten Kumar, Associate Professor, Auckland University of Technology; and Mathieu Pedemonte, Graduate Student, University of California, Berkeley) Paper/Presentation Discussant: Ricardo Reis, Professor, London School of Economics Paper/Presentation 11:30 Coffee break ECB Forum on Central Banking, June 2018 3 12:00 Panel: Macroeconomics of price and wage-setting Chair: Peter Praet, Member of the Executive Board, European Central Bank Jim Bullard, President, Federal Reserve Bank of St. Louis Paper/Presentation Kristin J. Forbes, Professor, Massachusetts Institute of Technology Paper/Presentation Philip R. Lane, Governor, Central Bank of Ireland Charles Wyplosz, Professor, Graduate Institute of International and Development Studies, Geneva Paper/Presentation 13:30 Lunch 18:30 Reception and dinner Wednesday, 20 June 9:00 Session 2 Microeconomics of price and wage-setting Chair: Sabine Lautenschläger, Member of the Executive Board and Vice-Chair of the Supervisory Board, European Central Bank Measuring inflation in the modern economy – a micro price-setting view Aviv Nevo, Professor, University of Pennsylvania (with Arlene Wong, Assistant Professor, Princeton University) Paper/Presentation Discussant: Michael Weber, Assistant Professor, University of Chicago Paper/Presentation Productivity growth, wage growth and unions Uta Schönberg, Professor, University College London (UCL) (with Alice Kügler and Ragnhild Schreiner, both Postdoctoral Research Fellows, CReAM/UCL) Paper/Presentation Discussant: Michael C. Burda, Professor, Humboldt University Berlin Paper/Presentation 11:00 Coffee break 11:30 Panel: Microeconomics of price and wage-setting Chair: Benoît Cœuré, Member of the Executive Board, European Central Bank Erica L. Groshen, Visiting Professor, Cornell University Paper/Presentation ECB Forum on Central Banking, June 2018 4 Philippe Marcadent, Chief of the Inclusive Labour Markets, Labour Relations and Working Conditions Branch, ILO Paper/Presentation Tommaso Valletti, Chief Competition Economist, European Commission Paper/Presentation Klaus F. Zimmermann, President, Global Labor Organization, and Maastricht University 13:00 Lunch 14:30 Policy panel Mario Draghi, President, European Central Bank Haruhiko Kuroda, Governor, Bank of Japan Philip Lowe, Governor, Reserve Bank of Australia Jerome H. Powell, Chairman, Board of Governors of the Federal Reserve System Moderator: Stephanie Flanders, Bloomberg Economics 16:00 Award ceremony – Young economists’ posters Closing remarks Group photo 18:30 Reception and dinner hosted by the Banco de Portugal ECB Forum on Central Banking, June 2018 5 Price and wage-setting in advanced economies: takeaways from the ECB’s 2018 Sintra Forum By Philipp Hartmann and Peter McAdam1 Abstract The origins and implications of the low inflation dynamics that characterised the post-crisis recoveries in many advanced economies were at the heart of the EC B’s 2018 Sintra Forum on Central Banking. In this article, two of the organisers highlight some of the main points from the papers and discussions, including why measured economic slack did not translate into more vivid price and wage growth, which role inflation expectations play in the conduct of monetary policy as well as where the challenges lie in reconciling changes in firms’ micro price-setting with aggregate inflation dynamics. This year’s ECB Forum on Central Banking focused on the core issue for monetary policy of why inflation accelerated so moderately in the recoveries that followed the crises in advanced economies. Policymakers, academics and market economists debated price and wage-setting from both macroeconomic and microeconomic perspectives. In this introductory chapter we summarise four of the main themes that were keenly debated in Sintra in June 2018: explanations as to why the Phillips curve has flattened and its implications; the sources and implications of low real wage growth; central bank communication with respect to inflation expectations; and key challenges in reconciling changes in micro price-setting behaviour with macroeconomic inflation developments. The full set of papers, discussions and speeches can be found in the other chapters of these proceedings and video recordings of all sessions on the Sintra Forum website.2 1 Slack and the flat Phillips curve: international factors, regime switches, slow adjustment or mismeasurement? The vanishing slope of the Phillips curve over the last few decades raises major questions about how the low-inflation phenomenon should be understood (see the previous discussion on this at the 2015 Sintra Forum; Constâncio et al. 2015). Put 1 Both European Central Bank. We are grateful to Benoît Cœuré, Luca Dedola, Martin Eiglsperger and Peter Praet for comments and discussions. All views expressed are summarised to the best of the authors’ understanding from the various Sintra participants’ Forum contributions and should not be interpreted as the views of the ECB or the Eurosystem. Any errors are our own. 2 A shorter version of this chapter is available on VoxEU. ECB Forum on Central Banking, June 2018 6 another way, the empirical relationship between economic slack and wage and price developments seems to have weakened considerably in many advanced economies. Participants put forward many arguments that could explain why the Phillips curve is flat. In the opening paper, Jim Stock and Mark Watson (2018) argue that mismeasurement of inflation may be one culprit. Once price index components that do not react to the business cycle (or that are badly measured) as well as trends are taken out, the negative relationship between different measures of slack and the resulting indicator of “cyclically sensitive inflation” (CSI) in the United States remains stable and statistically significant over the last few decades. Chart 1 shows that the CSI indicator estimated by Stock and Watson for the euro area (black solid line) increased only very gradually in the last few years (see ECB 2014 for a similar methodology). This would suggest that the observed low inflation in the euro area is not a measurement artefact. In contrast to the US CSI, it is also quite close to the Harmonised Index of Consumer Prices (HICP) excluding energy and food (dashed blue line), a more standard measure of “core inflation” (which takes the most volatile components out of the index).
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