8/13/2019 Spring 2014 Optimal Bundle: Issue V

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INFLATIONEXPECTATIONSANDJAPAN

Expectations of inflation are what firms and workers think inflationwill be in the future, and these predictions greatly affect businessinvestment and consumer consumption. Central banks help set in-flationary expectations, often announcing a goal of 2% inflationthrough quantitative easing. Quantitative easing, or QE, is mone-tary policy involving a combination of bond-buying, lowering in-terest rates, and setting inflationary expectations. If inflationaryexpectations exceed inflation through QE, expected inflation willincrease, firms will adjust their payrolls, and consumers will spendmore to compensate for additional inflation later. Economists Ste-ve Williamson and Iza Kaminska claim that QE is deflationary dueto falling liquidity premiums on government debt. Japan's first QE

program is cited as proof; it failed to reach an inflation target of2%. This claim misses the importance of expectations. Japan's cur-rent QE is guiding inflation by changing inflationary expectations,showing that raising expectations is a good policy that raises infla-tion to a 2% target.

Japan's first QE program failed to increase inflation because expec-tations were that the Bank of Japan would stop the quantitative eas-ing program before reaching 2% inflation. Japan has had harmfuldeflation or low inflation for decades, but the BOJs newest round

of QE is changing that. Japan's current third QE program is pro-ducing mild inflation, and inflationary expectations are greatly ex-ceeding historical averages from the past decade. This change inexpectations makes this round of QE a success, as rising inflation-ary expectations successfully raised inflation in Japan. No centralbank should ever discount the importance of expectations.CL

THEPENNSYLVANIASTATEUNIVERSITYECONOMICSASSOCIATIONPRESENTS :

EDITOR: COLE LENNONPRINTEDUCATIONCOORDINATORCONTRIBUTORS : LEAH G ALAMBA, JOE KEARNS, COLE LENNON,RYAN SOSNADER, ELEANORTSAI

SPRING2014: WEEKOF FEBRUARY 13TH

THEOPTIMALBUNDLE

Upcoming Events: Psuea.orgEA HomepagePsuea.org/blogEducation Blog

General Body Meeting: 2/13

Fed Semi-Annual Testimony: 2/13

You can take those expectations right to

the bank.

Hearing the rumblings of inflation.

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8/13/2019 Spring 2014 Optimal Bundle: Issue V

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OLYMPICANDECONOMICPERFOMANCE

The Winter Olympics not only put each countries athletes to the test,

but also their economies. Studies show that the number of medals a

country takes home from the Winter Olympics correlates with GDP

growth, meaning athletes rarely win until their country has undergone

certain economic development. A case-in-point: Japan earned its firstmedal in 1956, during its post-World War II economic recovery. Its med-

al count increased with consumption in the 1980s, and now the power-

house exhibits consistent performance at the Winter Olympics. Keep

watching this years Games; the results may as much about economics as

sports.ET

WAGESONTHEHOMEFRONTA new study found that approximately 21 million Americans are nowrelying on low-wage jobs as their sole source of income. The study isdifferent than previous ones conducted on this matter, as it excludesteenagers and spouses who work low-wage jobs to supplement theirparents or partners income. Over the past 30 years the amount ofpeople living in low-wage households has increased 94% and nowmakes up around 14% of all workers in the country. The majority ofthese people are single individuals living alone or with adult relatives,showing that workers are struggling to leave one house and afford one

of their own.LG

THEUPSANDDOWNSOFRECENTOILPRICES

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U-S-A, U-S-A.

Low-wage income isnt exactly

what theyd hoped for.

Getting down to business.

The price of crude oil increased by more than $2 last Friday, a result ofthe sharp increase in demand due to cold weather across the U.S. Naturalgas has become increasingly expensive, so utilities are opting for fuel oil togenerate electricity. Another contributor to this price increase is the lim-ited supply of oil in international markets. Britains biggest oilfield, Buz-zard, is undergoing nine weeks of maintenance. Other European oil refin-ers are cutting capacity to maximize profits. Additionally, the negotiationsbetween the IAEA and Iran have influenced the market. Ongoing sanc-tions have cut Iranian oil supply in half over two years, putting more up-ward pressure on oil prices worldwide.JK

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