The Impact of Inflation Uncertainty on Output Growth and Inflation in Thailand*

We explore the impact of inflation uncertainty on output growth in Thailand, an emerging market economy with moderate inflation. Inflation and output uncertainty are modeled in a bivariate constant conditional correlation generalized autoregressive conditional heteroskedastic (AR(p)‐cccGARCH(1,1)) specification. We include the exchange rate in the mean equations, and use the headline and core inflation rates and industrial production to generate inflation and output uncertainty series. These series are then used in Granger causality tests to make inferences about the effect of monetary policy‐induced inflation uncertainty. Causality tests show a positive relation from inflation to inflation uncertainty. Additionally, increased inflation uncertainty decreases output. These results are consistent with real costs associated with moderate inflation. Finally, we find no evidence that monetary policy reduced these costs.     

Understanding the inflation–output nexus for China

In this article we examine several hypotheses relating to output and inflation dynamics in China. The hypotheses tests are based on the exponential generalised autoregressive conditional heteroskedasticity (EGARCH) model of Nelson [Nelson, D. (1991). Conditional heteroskedasticity in asset return: A new approach, Econometrica, 59, 347–370]. Our findings suggest that Chinese output–inflation behaviour is consistent with the hypothesis that increased inflation uncertainty lowers average inflation; the hypothesis that inflation volatility reduces economic growth and the hypothesis that higher output volatility increases economic growth. However, we find no support for the hypothesis that higher output volatility increases the average inflation rate.     

Re‐Examining the Role of Structural Change and Nonlinearities in a Phillips Curve Model for South Africa

Although studies generally find evidence of a Phillips curve‐type relationship in South Africa, uncertainty remains about the relevance of the model over a relatively long sample period, and whether conventional output gap measures are suitable proxies for demand pressure. This paper reviews research which shows that the Phillips curve model prevails over an extended sample, provided that the benchmark specifications include major structural changes in the balance‐of‐payments and labour market, and account for shifts in the root causes of inflation. When this is done, a linear specification with an output gap in levels correctly predicts the non‐trended inflation pattern over the period 1971(Q1)–1984(Q4), whereas a piecewise concave curve with an output gap in growth rates accurately forecasts the decelerating inflation pattern during 1986(Q1)–2001(Q2). A novel feature of the concave model is that it remains statistically robust and structurally stable when it is estimated until 2015(Q4). The concave model imparts a disinflationary bias, which suggests that monetary policy should be more expansionary during downswing phases of the business cycle and neutral during upswing phases. The analysis also considers how the shape of the Phillips curve might change if the balance‐of‐payments constraint on demand is relaxed in a significant way.     

Asymmetric effects of inflation shocks on inflation uncertainty

The empirically documented regularity that dis-inflationary shocks are associated with larger output changes than are positive shocks presents an interesting puzzle to macroeconomists. This paper presents, and empirically supports, a new explanation for this asymmetry. The authors show, using a TARCH model, that negative inflationary shocks result in greater inflation uncertainty than positive shocks. As Friedman [1977] argues, and a body of empirical evidence demonstrates, inflation uncertainty leads to lower output growth. Drawing on this explanation, this essay points to an avenue by which the output asymmetry of inflationary shocks can be explained.     

Measurement of trend growth in European industrial output before 1914: Methodological issues and new estimates

The paper uses a structural time series model to reconsider growth in industrial output in 19th-century Europe. The approach is based on an unobserved components methodology in which there is no ex-ante specification of dates at which the trend is hypothesized to have changed and both trend and cycle are stochastic. We find that trend growth was variable over time in several cases but in general was less volatile than has been claimed and also that in general these times series of industrial output are difference rather than trend stationary.     

Revisiting the Phillips curve for Indonesia: What can we learn from regional data?

This study seeks new empirical evidence of the Phillips curve in Indonesia, an emerging and geographically diversified economy. There are three important contributions from this research. First, applying panel econometric method to exploit regional variation, the study resolves the issue of using on-target national inflation rates that potentially causes weakening inflation-output link. Second, the research examines the relevance of mining industry for output gap measurement at regional level. Third, it highlights the differences in the Phillips curve between the west and east regions owing to their different underlying economic structures. Our estimation using regional data support the validity of the Phillips curve relationship in Indonesia. Backward-looking inflation expectations, exchange rate dynamics and international prices also significantly affect inflation. In addition, the effect of output gap on inflation is larger if the mining sector is excluded from output gap measurement. Finally, we find apparent differences between the west and the eastern regions in the slope of Phillips curve, as well as in the degree of inflation persistence and exchange rate pass-through. The results are robust to alternative specification. Our study adds significantly to the empirical literature on the Phillips curve and have meaningful policy implications.     

THE SOUTH AFRICAN PHILLIPS CURVE: HOW APPLICABLE IS THE GORDON MODEL?

Is there a Phillips curve relationship present in South Africa and if so, what form does it take? Traditionally the method to establish whether or not there is a relationship between the output gap and the change in inflation is merely to regress the latter on the former. This yields the well‐known augmented Phillips curve. However, Gordon has argued that this specification of the Phillips curve produces biased results. Instead, he puts forward and estimates successfully for several industrialised countries his so‐called triangular model that tests for hysteresis and inertia in the behaviour of inflation, as well as the impact on inflation of changes in the output level. This paper considers whether or not Gordon's triangle model is applicable to South Africa, i.e. are hysteresis and inertia present in South Africa? In addition, in an attempt to find a better estimation of the output gap, the paper also experiments with alternative ways to estimate the long‐run output level, including the standard HP‐filter, as well as a production function approach.     

Robust determinants of growth in Asian developing economies: A Bayesian panel data model averaging approach

This paper investigates the determinants of growth in the Asian developing economies. We use Bayesian model averaging (BMA) in the context of a dynamic panel data growth regression to overcome the uncertainty over the choice of control variables. In addition, we use a Bayesian algorithm to analyze a large number of competing models. Among the explanatory variables, we include a nonlinear function of inflation that allows for threshold effects. We use an unbalanced panel data set of 27 Asian developing countries over the period 1980–2009. Our empirical evidence on the determinants of growth suggests that an economy's investment ratio is positively correlated to growth, whereas government consumption expenditure and terms of trade are negatively correlated. We also find evidence of a nonlinear relationship between inflation and economic growth, that is, inflation impedes economic growth when it exceeds 5.43% but does not have any significant effect on growth below that level.     

Separating shocks from cyclicality in Indian aggregate supply

Simultaneity issues as well as incorrect measurement of shocks and of the cyclical variable bias estimated slopes of the Indian aggregate supply curve (AS). Our initial Generalised Method of Moments estimation, based on a filtered output gap variable and including supply shocks, also gives an unrealistic downward sloping AS. But we find measures of asymmetries in price changes outperform traditional measures of supply shocks. Estimation using marginal costs as a proxy for the output gap gives a positive coefficient that reduces in size on including our comprehensive supply shock variable, implying the correct AS has a small positive slope, but is subject to multiple shifts. The semi-structural specification, closer to firms’ actual decisions, gives estimates of structural parameters such as degree of price stickiness and extent of forward-looking price adjustment. The results more correctly separate shocks from cyclicality, help to interpret India's growth and inflation experience, and have implications for policy.     

DETERMINANTS OF INFLATION IN GHANA: AN EMPIRICAL INVESTIGATION

This paper provides an empirical analysis of the factors accounting for inflation dynamics in Ghana using the bounds test and other econometric approaches. We find that real output, nominal exchange rate, broad money supply, nominal interest rate and fiscal deficit play a dominant role in the inflationary process in Ghana. To the extent that output growth by far has the strongest impact on inflation, targeting supply‐side constraints will help moderate price inflation. The paper concludes that inflation in Ghana is explained by a combination of structural and monetary factors consistent with prior studies.     

The Effect of Recessions on the Relationship between Output Variability and Growth

This paper investigates the relationship between output volatility and growth using postwar real GDP data for the United States. We expand on recent research by Beaudry and Koop (1993), documenting the asymmetric effect of recessions on output growth. The results presented in this paper suggest that output volatility is highest when the economy is contracting. While we find that the economy expands most rapidly following a recession, this expansion is offset by the negative impact of output uncertainty.     

Macroeconomic Volatility, Trade and Financial Liberalization in Africa

This paper examines the effects of financial and trade liberalization on growth volatility of real output and consumption in Africa. Our results suggest trade liberalization is associated with greater output and consumption growth volatility while financial liberalization increases the efficacy of consumption smoothing and stabilizes income and consumption growth. In addition, we find financial market depth and institutional quality operate jointly with trade and financial openness to reduce volatility in output and consumption growth. There is also evidence that good institutions which foster low inflation levels and volatility promote consumption and output growth stability.     

MODELLING INFLATION IN SOUTH AFRICA: A MULTIVARIATE COINTEGRATION ANALYSIS

We employ an expectations augmented Phillips curve framework to investigate the link between inflation, unit labour costs, the output gap, the real exchange rate and inflation expectations. Using multivariate cointegration techniques, we find evidence consistent with mark‐up behaviour of output prices over unit labour costs. Most importantly, we find that the mark‐up in the South African economy is much higher than in the U.S. For South Africa we find a markup of about 30 per cent: three times as high as the 10 per cent markup found for the U.S.     

The New Keynesian Phillips Curve and Lagged Inflation: A Case of Spurious Correlation?

The New Keynesian Phillips Curve (NKPC) specifies a relationship between inflation and a forcing variable and the current period's expectation of future inflation. Most empirical estimates of the NKPC, typically based on generalized method of moments (GMM) estimation, have found a significant role for lagged inflation, producing a “hybrid” NKPC. Using U.S. quarterly data, this article examines whether the role of lagged inflation in the NKPC might be due to the spurious outcome of specification biases. Like previous investigators, we employ GMM estimation and, like those investigators, we find a significant effect for lagged inflation. We also use time varying coefficient (TVC) estimation, a procedure that produces consistency under a variety of sources of misspecification. Using two separate measures of expected inflation, we find strong support for the view that, under TVC estimation, the coefficient on expected inflation is near unity and that the role of lagged inflation in the NKPC is spurious.     

MACROECONOMIC UNCERTAINTY AND AGGREGATE PRIVATE INVESTMENT IN SOUTH AFRICA

This paper investigates the effects of time varying uncertainty on aggregate private fixed investment in South Africa. The GARCH generated measures of volatility of selected macroeconomic variables indicating five measures of uncertainty are used in the analysis. These are output growth uncertainty, uncertainty about changes in the real effective exchange rate, uncertainty about changes in the real interest rate, producer inflation uncertainty, and terms of trade uncertainty. The results of the estimation by an empirical ECM model of conventional investment determinants controlling for the effects of uncertainty indicated that, over all, time varying macroeconomic uncertainty significantly reduces private fixed investment.     

Inflation and price instability in China: A comment

In a recent article in the Review, Yi (1990) explores the relationship between the level of inflation in China and its predictability. Based on seven different models of the inflation expectations process, the evidence presented unambiguously supports the hypothesis that an increase in the level of inflation is positively associated with an increase in uncertainty about it. To test the robustness of this result, I explicitly account for two outliers in the inflation series and determine whether Yi's results hold after this adjustment. Once the influence of these two outliers are accounted for, there is no support for the level/uncertainty hypothesis using data for China.     

Temporary Acceleration of Inflation: What Can a Central Bank Learn from It?

In this article I present a model in which the monetary authority conducts policy by setting money supply in the presence of uncertainty and Bayesian learning about the economic environment. I find that there exists a set of assumptions under which a temporary acceleration of money growth and thus of inflation increases the government's overall expected utility. There also exists a set of assumptions under which a temporary deceleration of money growth and thus of inflation increases the government's overall expected utility.     

Real exchange rate misalignment and business cycle fluctuations in the Asia-Pacific

Real exchange rate (RER) misalignment, which is the deviation between the actual real exchange rate from its equilibrium, occurs frequently among developing countries. Studies have shown that RER misalignment may have negative economic implications, such as a decline in economic growth, exports, and export diversification and an increased risk of currency crises and political instability. Using quarterly data for 22 sample countries from 1990 to 2018, this paper investigates the impact of RER misalignment on business cycles in the Asia-Pacific by employing a panel vector autoregression involving consumer price index (CPI) inflation, output gap, short-term interest rates, and RER misalignment. We find that RER overvaluation may reduce CPI inflation and short-term interest rates. We also find that the Asia-Pacific region is highly heterogeneous in that the output gaps of some countries, particularly from the Southeast Asian region, are more susceptible to RER misalignment shocks.     

Exploring the Case for Monetary Integration between the Chinese Mainland and Hong Kong

This paper presents an empirical investigation on an important policy issue, namely, whether there is any evidence supporting monetary integration between the Chinese mainland and Hong Kong. We follow two lines of inquiry. First, we present a series of simple tests to find the extent to which trade and/or financial linkages exist between the two regions. Second, we use simple inflation and output differentials and structural VAR techniques to test for the degree of business cycle synchronization between the two regions. The results indicate that there is evidence supporting the existence of trade linkages and that there is also support for the possible synchronization of business cycles. We discuss the implications of this for monetary integration between Hong Kong and the mainland.     

Overall and time-varying effects of global and domestic uncertainty on the Korean economy

This study analyzes the overall and time-varying effects of global and domestic uncertainty on the Korean economy by estimating constant parameter and time-varying parameter vector autoregressive models. Global and Korea-specific uncertainty are measured using the method proposed by Mumtaz and Theodoridis (2017). A rise in both the uncertainty measures has an adverse impact on the Korean economy by lowering stock market returns and output growth, and by creating inflation caused by currency depreciation. Quantitatively, the domestic uncertainty shock exercises a larger effect on the Korean economy than the global uncertainty shock, as the former uncertainty shock accounts for about one-fifth of output variation and the latter accounts for about one-tenth. Regarding time-varying effects, substantial increases in domestic uncertainty during the Asian Financial Crisis and global uncertainty during the Global Financial Crisis explain a significant part of macroeconomic fluctuations in Korea during those periods. This is because of the increased volatility of uncertainty shocks during these periods, rather than a structural change in the way these shocks affect the economy.