Biflation - Explained
What is biflation?
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Table of ContentsWhat is Biflation?Why is Biflation Important?Causes of BiflationAcademic Research on Biflation
What is Biflation?
Biflation is an unusual situation in an economy where inflation and deflation exist simultaneously. When both inflation and deflation exist at the same time in an economy, Biflation has occurred. Osborne Brown, a Senior Financial Analyst coined the term "Biflation" in 2003. It is a situation whereby some prices are rising while some are falling simultaneously in an economy. Sometimes called mixed inflation, a biflation occurs in a fragile economy.
Back to: ECONOMIC ANALYSIS & MONETARY POLICY
Why is Biflation Important?
A state in an economy where some assets have higher (rising) prices and some declining (falling) prices is referred to as Biflation. This is a rare occurrence in the economy. A good example of biflation occurred in the United States after the Great Recession when the central bank in an attempt to stimulate the economy released monetary spigots which led to the economy experiencing deflation in some sectors and inflation in others. For instance, the real estate saw deflation while energy and precious objects saw inflation. From 2009 through 2012, different sectors witnessed rising and falling in price simultaneously.
Causes of Biflation
It has been projected that biflation is a rare or unusual economic situation which might likely not happen again. The major factors that led to biflation include the following;
- Markets and economic events and patterns after the 2008 great recession, which led to an utmost decline in the economy, especially in the housing sector.
- The unleashing of trillions of dollars in the economy by the Federal Reserve in an effort to keep the economy afloat. This led to prices in some sectors of the economy rising while prices in others were falling.
Academic Research on Biflation
- Managing financial risk of longevity, Solarz, J. K. (2017). Managing financial risk of longevity.Europa Regionum, (30), 33-47. The financial implications of people living longer than expected (so-called longevity risk) are very large. There are different implications for individuals, for households, for insurers, for local and central governments. Longevity is public goods for local and central government. Longevity is merit goods for insurers. Longevity is club goods for households. Longevity is private goods for individuals. Addressing longevity risk requires a multi-pronged policy approach. First, governments, local and central, should acknowledge the significance of longevity risk. Second, this risk should be appropriately shared between individuals, households, insurers and the government. Third, financial risk of longevity should be transferred to those that are better able to manage it. Moreover, longevity risk is a long-tailed risk. However, there is a limit to the number of capital market participants that are willing to provide long-term risk transfer solutions. In the paper there are highlighted a number of instruments for management financial risk of longevity. All participants in management financial risk of longevity need to: acknowledge their exposure to longevity risk, put in place methods for better risk sharing between governments, insurers, households and individuals, promote financial innovations for the transfer of longevity risk, provide better information on longevity and better education on old age finance. In sum, better recognition and mitigation of longevity risk should be undertaken now, including thorough risk sharing between individuals, households, insurers and government through the development of a liquid longevity risk transfer market. Longevity risk is already on the doorstep and effectively addressing it will be the more difficult, the longer remedial action is delayed.
- The auction of financial securities: A study of the treasury auction market, Barker-Rogers, T. M. (2001).The auction of financial securities: A study of the treasury auction market(Doctoral dissertation, Texas Tech University).
- Wage and Price Stickiness in Macroeconomics: Historical Perspective, Laidler, D. (1996). Wage and Price Stickiness in Macroeconomics: Historical Perspective. InMonetary Economics in the 1990s(pp. 92-121). Palgrave Macmillan, London. There is more to the history of macroeconomics than a series of bilateral conflicts between competing schools of thought, but such debates have been a significant part of the story. Most recently the competing schools have worn the labels New-classical and New-Keynesian, and the major issue between them has been the role of money wage- and price-stickiness in generating those more or less regular fluctuations in economic activity which we refer to as the business cycle. For New-classicals, output and employment fluctuations are either responses to shocks to tastes and technology, or to unanticipated shifts in aggregate demand, typically stemming from money supply changes. In either cases though, prices give signals to which quantities respond, and variations in real magnitudes take place precisely because prices change. New-Keynesians emphasise demand-side shocks but, in their view, quantities vary, not because prices vary, but because they do not.