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Friday, February 19, 2016

Goldman: Inflation "likely to rise more than bond markets currently discount"

by Calculated Risk on 2/19/2016 07:01:00 PM

Some interesting comments from a research note by Goldman Sachs economists Sven Jari Stehn and Jan Hatzius: Meeting the Low Bar. A few excerpts:

In recent years, economic forecasters have been too optimistic about GDP growth but too pessimistic about employment across many advanced economies. To better understand this puzzle, we construct a new supply side model for the US, the Euro area, Japan, and the UK. ...

... our results have two potential implications for bond markets. First, with output and employment already close to potential in the US and the UK, inflation there is likely to rise more than bond markets currently discount. Second, assuming that the hit to potential is truly one-off, potential growth should pick up modestly in coming years, and thus challenge the market’s view that we have entered an era of secular stagnation and permanently depressed real interest rates.