Central Bank Balance Sheet Policies and Inflation Expectations

We analyse the empirical effects of credit easing and quantitative easing on inflation expectations and exchange rates. Both monetary policy strategies are summarised in measures for composition and size of the central bank balance sheet and are included in a VAR model. The results show that changes in balance sheet size had positive, albeit weak effects on inflation expectations in Japan, while the effects were negligible in the euro area. By contrast, an increasing balance sheet size is associated with reduced short-term inflation expectations in the US and UK, pointing at negative signalling effects. Shocks to balance sheet size or composition have no substantial effects on long-term inflation expectations in the euro area, US and UK. An expanding balance sheet size is associated with a depreciation of the euro, pound sterling and Japanese yen.     

Commodity prices and monetary policy in emerging East Asia during the global financial crisis

In the first phase of the global financial crisis, rising inflation was a major concern for emerging East Asian central banks. Coupled with a slowing US economy, regional central banks faced a monetary policy dilemma of either addressing higher inflation or supporting moderate growth. Higher food and fuel prices were the major drivers of headline inflation. Their causes, however, were a confluence of mutually reinforcing cyclical and structural factors. Understandably, different economies faced a different balance of risks between price stability and growth; but to attribute the inflation to supply shocks alone was misleading. This was unsettling given that inflation and inflation expectations were on the rise, and without much credibility, the reluctance of many central banks to raise interest rates risked repeating the mistake the advanced economies made in the 1970s. Without credibility, inflation expectations are unlikely to be well anchored. To gain credibility, a central bank must ‘walk‐the‐talk’, and understandably it must have the autonomy to do so.     

Optimal Monetary Policy in China

Using the structural vector autoregression model, we estimate the current responses of monetary policy to contemporaneous shocks from macroeconomic variables. Our findings indicate that the People's Bank of China responded to inflation and output changes, but did not react to asset price fluctuations during the period from January 1997 to March 2010. The optimal monetary responses to exogenous shocks are also examined. It is revealed that using asset prices to formulate monetary policy would not help to improve monetary authorities' performance in lowering the volatilities of output growth and inflation while keeping output growth and inflation in their safety zones. The effectiveness of monetary policy and fiscal policy in reacting to external shocks is also discussed.     

Changes in world real interest rates and inflationary expectations

Changes in World Real Interest Rates and Inflationary Expectations. —One of the major macroeconomic puzzles has been that the real interest rates were persistently low in the seventies and persistently high in the eighties. The authors use a news framework to investigate the extent to which shocks in real output, money supply, world trade, oil prices, stock prices and expected inflation affect the world and national real interest rates. They find dominant effects on real interest rates from movements in expected inflation rates. This suggests the presence of persistent misperceptions about future inflation and the need of further research into the formation of inflationary expectations.     

Global food prices and monetary policy in an emerging market economy: The case of India

This paper investigates a perception in the political debates as to what extent poor countries are affected by price movements in the global commodity markets. To test this perception, we use the case of India to establish in a standard SVAR model that global food prices influence aggregate prices and food prices in India. To further analyze these empirical results, we specify a small open economy New-Keynesian model including oil and food prices and estimate it using observed data over the period 1996Q2 to 2013Q2 by applying Bayesian estimation techniques. The results suggest that a big part of the variation in inflation in India is due to cost-push shocks and, mainly during the years 2008 and 2010, also to global food price shocks, after having controlled for exogenous rainfall shocks. We conclude that the inflationary supply shocks (cost-push, oil price, domestic food price and global food price shocks) are important contributors to inflation in India. Since the monetary authority responds to these supply shocks with a higher interest rate which tends to slow growth, this raises concerns about how such output losses can be prevented by reducing exposure to commodity price shocks.     

Does China have Inflationary Effects on the USA and Japan？

With China＇s share in global trade increasing rapidly, some argued in 2002-2003 that China was exporting deflation to other countries as it was dumping cheap goods in mature markets. Later, others argued that China was causing sharp increases in global prices. This paper uses several econometric techniques to assess the extent of the link between inflation rates between China and the USA and Japan. Only limited empirical evidence at the aggregate level is found for consumer price inflation in China leading to price changes in the USA and Japan. However, there is some evidence that inflation in the USA has an impact on Chinese inflation. The results seem consistent with the Federal Reserve and the Bank of Japan being concerned about inflation and, hence, adjusting policy such that inflation shocks have no significant effect on overall inflation. Recent Chinese price rises are unlikely to have a material effect on the USA or Japan.     

Chinese exchange rate and price effects on G3 import prices

This paper explores the degree of price and exchange rate interdependence between China and the G3 (US, Japan and the Euro-zone) by undertaking a VAR based shock analysis. A GARCH framework is also employed to derive the conditional variances to uncover the extent of volatility transmission. We address two key issues. First as there have been concerns about low value-added cheap Chinese goods flooding G3 markets, we attempt to measure the impact of Chinese prices on G3 import prices. Second, we focus on the transmission of exchange rate shocks – a subject which we approach by examining shocks in China's bilateral exchange rate with each of these major trading partners (the US, Japan and the Euro Area). Our results indicate that reduced import prices from China are the channel through which aggregate domestic prices in the G3 remain depressed, while the impact of the RMB exchange rate with G3 currencies appears less powerful. This finding implies that the Chinese authorities’ RMB exchange rate policy is relatively unimportant and, in particular, that a revaluation of the RMB would not do much to reduce the US trade deficit. In terms of volatility spillover, the relatively flexible RMB exchange rate against the Euro results in RMB-EUR volatility having a stronger influence than the more tightly controlled RMB-USD rate on the volatility of Chinese export prices.     

Impact of uncertainty and exchange rate shocks: Theory and global empirics

This paper offers two points on the impact of uncertainty and exchange rate shocks. (1) A conceptual model where behavioural frictions – rational inattentiveness and bounded expectations – interact with uncertainty, generating aggregate fluctuations. Central banks can target these behavioural frictions to stabilise output and prices. (2) Empirical findings from a panel of advanced and emerging economies. Output and inflation slow in response to uncertainty shocks. Government bond yields moderate and exchange rates depreciate, suggesting within-country and between-country flight-to-safety respectively. Exchange rate appreciation shocks generate similar responses. The Malaysia-specific analysis finds divergent responses in employment and output, likely reflecting compositional effects in more productive tradable and less productive non-tradable sectors.     

HONG KONG'S INFLATION AND DEFLATION UNDER THE US DOLLAR PEG: THE BALASSA-SAMUELSON EFFECT OR EXPORT PRICE SHOCKS?

Hong Kong's US dollar peg, adopted in 1983, has failed to deliver price stability. Hong Kong experienced high inflation before the Asian financial crisis and prolonged deflation after it. The annual rate of inflation (GDP-deflator based) was 7.4% in the first period (1985–97) and −2.0% in the second (1998–2007). There was no clear trend for the inflation rate to converge to the US level. The nominal anchor via a fixed exchange rate in Hong Kong had an upward and downward drift in the order of 4% from the US inflation rate, casting doubt on the anchor's efficacy. Despite Hong Kong's high output growth relative to that of the United States, the Balassa-Samuelson effect was not the main factor behind the pre-Asian crisis inflation. Price shocks in service exports played a major role in Hong Kong's general prices through the two periods.     

Pass-through Effects of Global Commodity Prices on China＇s Inflation： An Empirical Investigation

The present paper uses a two-step approach to estimate the pass-through effects of changes in international commodity prices and the RMB exchange rate on domestic consumer price inflation in China. We first estimate the pass-through effects of international commodity prices on producer prices and then estimate the pass-through effects of producer price inflation on consumer price inflation. We find that a l O-percent increase in international commodity prices would lead to China＇ s producer prices increasing by 1.2 percent 3 months later, which in turn would increase China＇ s domestic inflation by 0.24 percent over the same period. However, a 10-percent appreciation of the RMB exchange rate against the US dollar would help to reduce increases in producer prices by 4.4 percent over the following 3 months, which in turn would lead to a 0. 89-percent decline in consumer price inflation over the same period. Our findings suggest that appreciation of the RMB in an environment of rising global commodity prices and a weak US dollar could be an effective instrument to help contain inflation in China.     

Exchange Rate and Inflation Dynamics in a Resource Rich Setting: The Case of Zambia

This paper investigates the relationship between copper prices, the exchange rate and consumer price inflation in Zambia using a structural vector autoregression with quarterly data for 1995–2014 and a combination of sign and zero restrictions to identify relevant global and domestic shocks. The paper makes two contributions. First, it provides new measures of exchange rate pass through (ERPT), based on less restrictive assumptions than previous estimates, to show how changes in the value of the kwacha are reflected in changes in consumer prices (distinguishing food and non‐food inflation). Second, the ERPT is disaggregated to demonstrate that measured ERPT depends on the nature of the shock, with implications for policy responses. Although the price of copper is the most important driver of the exchange rate, the fluctuations it caused are associated with a low pass‐through of about 7% (consistent with a period of relatively low inflation). Exchange rate fluctuations caused by monetary shocks, in contrast, come with a pass‐through of up to 25% (and even more for food prices). A fast response by monetary authorities can mitigate the adverse effects of exchange rate shocks.     

Influence of oil prices on stock market indexes in Russia and Norway

The effects of oil price dynamics on share quotations are discussed in the paper for the 2000–2012 period for two oil exporting countries—Russia and Norway. It has been shown, using a vector autoregressive model, that, in spite of intuitive expectations, oil prices have not been a systematic risk factor for Russian and Norwegian stock market indices. In Norway, share quotations definitely responded to the dynamics of the US dollar exchange rate relative to the world’s main currencies and the S&P 500 stock index, as well as to fluctuations in the global and domestic interest rates, although to a lesser degree. In Russia, share quotations are practically exclusively affected by their own shocks (a factor that is explained by some specific features characterizing Russia’s major public companies).     

The International Transmission of Monetary Policy in a Dollar Pricing Model

This paper analyses the international transmission of monetary policy in the case where all export prices are set in US dollars. “Dollar pricing” implies that the international effects of US monetary shocks are different from those of European shocks because of an asymmetric exchange rate pass-through to import prices. A dollar pricing model can explain the observed asymmetry in the transmission of monetary policy: US monetary policy affects US output more than European monetary policy affects European output. I also show that the current account is an important channel through which monetary policy affects welfare. The paper concludes that under dollar pricing a monetary expansion is a beggar-thy-neighbour policy.     

The impact of world oil price shocks on macroeconomic variables in Vietnam: the transmission through domestic oil price

This study examines the impact of world oil price shocks on macroeconomic variables in Vietnam with a focus on the transmission channel of domestic oil prices. The Structural Vector Autoregression model with two blocks of real economy variables and monetary variables is employed. The world oil price follows an autoregressive process to reflect the exogenous nature of world oil price shocks to the domestic economy. The retail domestic oil price is determined simultaneously by only the world oil price due to the government's control of the domestic oil market. Using monthly data in the period between 2009 and 2021, the study indicates that a positive shock to world oil prices will increase the domestic oil prices significantly, industrial production (slightly and only statistically significant in the third month after), and inflation (significantly in 8 months). Besides, the domestic oil price is not the only transmission channel of world oil price shocks to the economy. This result implies forecasting, assessing, and controlling the impact of the world oil price shock on the economy should focus on both domestic oil prices and other indirect channels.     

Policy commitment and market expectations: Lessons learned from survey based evidence under Japan's quantitative easing policy

The Bank of Japan conducted its quantitative easing policy (QEP) from 2001 to 2006, with the policy commitment to maintaining its QEP until the CPI inflation rate became stably zero or higher. We evaluate its effects by using individual survey data on inflation expectations as well as interest rate expectations. Our analysis reveals a kinked relationship between interest rate expectations and inflation rate expectations at around the 0% threshold level of inflation expectations, in tune with this policy commitment. In addition, we evaluate the effects of the policy commitment on market expectations for the future path of short-term interest rates after the termination of the QEP. We find that, even when inflation expectations exceeded the threshold, interest rate expectations responded only gradually to inflation rate expectations.     

IS THERE AN ASYMMETRIC BEHAVIOUR IN AFRICAN INFLATION? A NON‐LINEAR APPROACH

In this paper we test the inflation persistence hypothesis as well as model the long‐run behaviour of inflation rates in a pool of African countries using a non‐linear framework. In order to do so, we rely on unit root tests applied to non‐linear models and fractional integration. The results show that the hypothesis of inflation persistence does not hold empirically for most of the countries. In addition, the estimated models (logistic smooth transition autoregressions) are stable in the sense that the variable tends to remain in the regime (low inflation or high inflation) once reached, and changes between regimes are only achieved after a shock. The results also indicate that the effects of the shocks on inflation tend to die out; exogenous factors, i.e. supply shocks and inertia may be causing this outcome, as they play a substantial role in the determination of the inflation rates for our selected African countries.     

Worldwide Inflation and International Monetary Reform： Exchange Rates or Interest Rates？

The international dollar standard is malfunctioning. Near‐zero US short‐term interest rates launch massive hot money outflows into emerging markets (EM) in Asia and Latin America. Each EM central bank buys dollars to prevent its currency from appreciating but loses monetary control. Despite some appreciation, average inflation in EMs is now much higher than in the old industrial economies and world commodity prices are bid up sharply. This inflation on the dollar's periphery only registers in the US CPI with a long lag. However, the more immediate effect of the Fed's zero interest rate is to upset the process of bank intermediation within the American economy. Bank credit continues to decline while employment languishes. Therefore, constructive international monetary reform calls for the Fed to abandon its zero‐interest rate policy, which is best done in cooperation with the European Central Bank, the Bank of Japan, and the Bank of England also abandoning their ultra low interest rates.     

国际大宗商品价格冲击、传递效应与中国的通货膨胀动态

本文在Philips曲线设定下,通过扩展该模型实证考察国际大宗商品价格冲击对中国通货膨胀动态的影响作用。本文在线性模型设定以及Markov机制转换设定下考察国际大宗商品价格冲击对中国国内通货膨胀的传递效应。本文实证研究结果表明,国际大宗商品价格动态变化不仅在统计意义上显著地影响着中国通货膨胀动态,而且个别类别的国际大宗商品价格变化对中国通货膨胀动态的传递效应相对明显。最后,结合经验研究结果,本文提供了相关政策建议和启示。     

What influences aggregate inflation expectations of households in India?

We analyse the factors influencing Indian households’ inflation expectations and draw out implications for inflation targeting. The literature finds news on inflation affecting expectations. Using quarterly data from India over 2008–2019, we find: (i) in estimated epidemiological models of learning in expectation formation, the response coefficient on inflation news in the shape of central bank forecasts exceeds coefficients estimated for advanced economies, implying official views having a relatively greater weight on expectations; (ii) error variance decompositions of expectations to shocks in variables including commodity and core inflations, demand and policy variables in a series of SVARs, also show policy communications affecting expectations in the short-term. Food inflation has a significant short-run effect on expectations, but demand determined core inflation dominates over the long run; (iii) impulse responses show a rise in the policy rate raising expectations. The above results show communications as more effective than policy rates in influencing inflation expectations.     

Foreign and Domestic Shocks: Macroeconomic Responses of ASEAN-3 Countries

Abstract

The study provides new empirical evidence on the relative importance of foreign and domestic shocks on selected ASEAN-3 (Malaysia, Indonesia, and Thailand) macroeconomic variables. Three structural vector auto regression models are estimated for each country. The focal point is given on the formulation of the sources of foreign factors. The first model uses trade-weighted foreign variables of both US and Japan to represent the foreign factors. The other two models use US and Japan by themselves, respectively, to represent the foreign factors. Two important results are emerged. First, foreign sectors play an important role in influencing macroeconomic variables of each of the ASEAN-3 country, especially in the medium and the long-run horizon. Second, most of the time, the Japanese factors are more dominant than the US factors in influencing domestic output and inflation for each of the ASEAN-3 countries.