Kim Ruhl writes:
The goal of this case study is to understand how inflation targeting works, and why deflation is so problematic for the NFL.
Key question. How does an inflation target help anchor expectations, thereby making the inflation target more powerful?
Related questions. Why are policy makers at central banks and professional football associations concerned about deflation? Who is hurt by unexpected deflation? Who is helped? How does it affect borrowers? Lenders? Defensive Ends?
Background. Early proponents of inflation targeting include Irving Fisher and John Keynes, although inflation targeting was not formally adopted in practice until New Zealand began targeting the consumer price index in 1990. Several central banks have followed suit, including those in the UK, Canada, Australia, South Korea, and Iceland. The Fédération Internationale de Football Association (FIFA) has adopted a somewhat loose inflation band of 8.5-15.6 psi (consider this in light of our discussion on institutional quality).
The NFL currently maintains an inflation target of 12.5-13.5 psi.
- January 18, 2015 The New England Patriots defeat the Indianapolis Colts 45-7.
- January 19, 2015 ESPN Sports Radio announces that 11 of the 12 balls supplied by the Patriots missed the inflation target and were found to be 2 psi below target — deflation.
- January 22, 2015 Tom Brady and Bill Belichick hold a press conference in an attempt to calm the market. Brady: “It’s not like I squeeze the football,” “I grip the football.” Belichick: “”I don’t know what the proper inflation feeling is but it felt like a normal ball” (How does this relate to Montagu Norman’s advice about central banking?)
Expert analysis and open questions.
Anticipating just such a problem, Paul Krugman quotes Ambrose Evans-Pritchard: “…deflation amounts to a betrayal…” (01/10/2015, NYT).
- Who is being betrayed? Why?
Tom Cooley and Kim Schoenholtz: “… needs to take this threat seriously and demonstrate now that it has the policy tools (and is prepared to use them) in the event of a new deflationary shock” (01/15/2014, CNBC).
- That deflationary shock has arrived. What kinds of policy tools could the NFL use? How could they be implemented in a time-consistent manner?
The “deflationary spiral” theory suggests that deflation can be a self-reinforcing policy: deflationary pressure today can lead to more deflation in the future, causing potentially disastrous results. The poster child for this phenomenon is Japan, where the “lost decade” saw chronic deflation and almost no GDP growth. Note: an underinflated football allows the quarterback a better grip when throwing.
- How relevant is the deflationary spiral? In answering this question, keep in mind that Tom Brady’s passer rating on Sunday was 100.4 compared to Andrew Luck’s 23.0.