Do global output gaps help forecast domestic inflation? Evidence from Phillips curves for Poland

This study confronts domestic and global views on inflation through the use of the Hybrid New Keynesian Phillips Curve (HNKPC) models estimated for headline and core inflation in Poland. We analyse the roles of the global vs. domestic output gaps in affecting price changes. We ensure that our conclusions are robust by taking into consideration various proxies for inflation expectations, imported inflation, the domestic output gap and the global output gap.Our results suggest that the global demand conditions are statistically insignificant in the majority of the estimated global versions of HNKPC, independently of the measure of them that is considered. In terms of empirical fit, and especially of the out-of-sample forecasting accuracy, the specifications of the Phillips curve with the domestic and global output gaps among the explanatory variables are not superior to traditional Phillips curves. Interestingly, the relative importance of the global output gap is much smaller in models that are estimated in terms of core inflation, excluding foodstuffs and energy, than in CPI inflation models. This suggests that global demand conditions affect the inflation in Poland indirectly, mainly through the prices of food and energy raw materials.The main conclusion from our study is that external factors that are already considered in the traditional hybrid versions of the new Keynesian Phillips curve are sufficient to account for global influences on prices in the domestic economy. The concept of the global output gap improves neither the explanatory nor the predictive power of HNKPC models.     

Catching-up and inflation in Europe: Balassa–Samuelson, Engel's Law and other culprits

This study analyses the impact of economic catching-up on annual inflation rates in the European Union with a special focus on the new member countries of Central and Eastern Europe. Using an array of estimation methods, we show that the Balassa-Samuelson effect is not an important driver of inflation rates. By contrast, we find that the initial price level and regulated prices strongly affect inflation outcomes in a nonlinear manner and that the extension of Engel's Law may hold during periods of very fast growth. We interpret these results as a sign that price level convergence comes from goods, market and non-market service prices. Furthermore, we find that the Phillips curve flattens with a decline in the inflation rate, that inflation is more persistent and that commodity prices have a stronger effect on inflation in a higher inflation environment.     

Forecasting solar stock prices using tree-based machine learning classification: How important are silver prices?

Solar energy is one of the fastest growing sources of electricity generation. Forecasting solar stock prices is important for investors and venture capitalists interested in the renewable energy sector. This paper uses tree-based machine learning methods to forecast the direction of solar stock prices. The feature set used in prediction includes a selection of well-known technical indicators, silver prices, silver price volatility, and oil price volatility. The solar stock price direction prediction accuracy of random forests, bagging, support vector machines, and extremely randomized trees is much higher than that of logit. For a forecast horizon of between 8 and 20 days, random forests, bagging, support vector machines, and extremely randomized trees achieve a prediction accuracy greater than 85%. Although not as prominent as technical indicators like MA200, WAD, and MA20, oil price volatility and silver price volatility are also important predictors. An investment portfolio trading strategy based on trading signals generated from the extremely randomized trees stock price direction prediction outperforms a simple buy and hold strategy. These results demonstrate the accuracy of using tree-based machine learning methods to forecast the direction of solar stock prices and adds to the broader literature on using machine learning techniques to forecast stock prices.     

Yield curve in an estimated nonlinear macro model

This paper estimates a sticky price macro model with US macro and term structure data using Bayesian methods. The model is solved by a nonlinear method. The posterior distribution of the parameters in the model is found to be bi-modal. The degree of nominal rigidity is high at one mode (“sticky price mode”) but is low at the other mode (“flexible price mode”). I find that the degree of nominal rigidity is important for identifying macro shocks that affect the yield curve. When prices are more flexible, a slowly varying inflation target of the central bank is the main driver of the overall level of the yield curve by changing long-run inflation expectations. In contrast, when prices are more sticky, a highly persistent markup shock is the main driver. The posterior probability of each mode is sensitive to the use of observed proxies for inflation expectations. Ignoring additional information from survey data on inflation expectations significantly reduces the posterior probability of the flexible price mode. Incorporating this additional information suggests that yield curve fluctuations can be better understood by focusing on the flexible price mode. Considering nonlinearities of the model solution also increases the posterior probability of the flexible price mode, although to a lesser degree than using survey data information.     

The Impact of the 2008 Crisis on UK Prices: What We Can Learn from the CPI Microdata1

This paper takes the locally collected price quotes used to construct the CPI index in the UK for the period 1996–2013 and explores the impact of the Great Recession (2008‐9) on the pricing behaviour of firms. We develop a time series framework which captures the link between macroeconomic variables and the behaviour of prices in terms of the frequency of price change, the dispersion of price levels and the size, dispersion and kurtosis of price‐growth. We find strong evidence for inflation having an effect, but not output. The change in the behaviour of prices during the Great Recession is largely explained by the changes in inflation and VAT. Nevertheless, the magnitude of the inflation effect is sufficiently small that it need not influence monetary policy.     

The Impact of the 2008 Crisis on UK Prices: What We Can Learn from the CPI Microdata1

This paper takes the locally collected price quotes used to construct the CPI index in the UK for the period 1996–2013 and explores the impact of the Great Recession (2008-9) on the pricing behaviour of firms. We develop a time series framework which captures the link between macroeconomic variables and the behaviour of prices in terms of the frequency of price change, the dispersion of price levels and the size, dispersion and kurtosis of price-growth. We find strong evidence for inflation having an effect, but not output. The change in the behaviour of prices during the Great Recession is largely explained by the changes in inflation and VAT. Nevertheless, the magnitude of the inflation effect is sufficiently small that it need not influence monetary policy.     

Prices and investment with collateral and default

This paper uses the framework of an OLG economy with three-period lived agents in which a durable good serves as collateral for loans, to study the effect of an unanticipated income shock when the economy is in a steady state equilibrium. We focus on the consequence of default on loans when the value of the collateral falls below the value of the debt it secures. We analyze the impulse response functions of the price and production of the durable good and show that there is an asymmetry between the response of the price and investment of the durable good to a positive and a negative income shock arising from default on the collateralized loans. We show that this asymmetry can be seen in the data on housing prices and construction and is attributable to the default on mortgages in periods of decreasing prices which acts as a turbo mechanism magnifying the decline in investment.     

The London Business School with Gower Publishing

Output has stagnated in the main industrialised countries this year but we expect the benefits of lower oil prices to show up in rapid growth from now on. The present weakness in the world economy stems from tighter US fiscal policy and the oil price shock itself. These have combined to reduce domestic demand in the United States, and hence to cut the market for Japanese exports in particular, and also to reduce expenditure by energydependent countries and companies. A further factor is that, with prices of oil-based products falling, there is an incentive to delay expenditure. We expect this impact effect of OPEC III to be short-lived and to give way to its positive effects in the second half of this year. Specifically, we expect consumer spending to lead the recovery as real incomes will be boosted by the terms of trade gain from lower oil prices - equivalent to 3 per cent of GNP in the OECD area as a whole. On the basis of oil prices holding at $15. we forecast OECD output growth of 3 per cent this year, rising to 41/2 per cent in 1987. Additionally, we expect lower oil prices to produce a significant reduction in world inflation. Zero growth of producer prices is forecast on average this year arid consumer price inflation is expected to fall to wards 2 per cent in the course of the year.     

Monetary policy,housing rents,and inflation dynamics

In this paper we study the effect of monetary policy shocks on housing rents. Our main finding is that, in contrast to house prices, housing rents increase in response to contractionary monetary policy shocks. We also find that, after a contractionary monetary policy shock, rental vacancies and the homeownership rate decline. This combination of results suggests that monetary policy may affect housing tenure decisions (own versus rent). In addition, we show that, with the exception of the shelter component, all other main components of the consumer price index (CPI) either decline in response to a contractionary monetary policy shock or are not responsive. These findings motivated us to study the statistical properties of alternative measures of inflation that exclude the shelter component. We find that measures of inflation that exclude shelter have most of the statistical properties of the widely used measures of inflation, such as the CPI and the price index for personal consumption expenditures, but have higher standard deviations and react more to monetary policy shocks. Finally, we show that the response of housing rents accounts for a large proportion of the “price puzzle” found in the literature.     

The effects of monetary policy in Russia: A factor-augmented VAR approach

Using factor-augmented vector autoregressive (FAVAR) models, this study examines the effects of the Central Bank of Russia’s (CBR) monetary policy on economic indicators. The sample includes 39 monthly macroeconomic series and covers the period 2004 through 2019. The analysis revealed counter-intuitive results, with consumer prices often responding positively to a contractionary monetary policy shock, and vice versa; this is related to the impossible trinity. The ruble exchange devaluation was accompanied by price increases through an import price pass-through, so the CBR chose exchange stability and free capital flows out of the impossible trinity, temporarily subordinating monetary policy independence. Such independence was limited, possibly due to Russia’s high dependence on energy exports and the link between energy prices and the exchange rate. The findings indicate no direct evidence of an effect of monetary policy tightening on the decrease in consumer prices; rather, the attenuation of ruble depreciation may have helped to stabilize prices, even after the CBR adopted inflation targeting.     

How should monetary policy respond to changes in the relative price of oil? Considering supply and demand shocks

This paper examines optimal monetary policy in a New Keynesian model where supply and demand shocks affect the price of oil. Optimal policy fully stabilizes core inflation when wages are flexible. The nominal rate rises (falls) in response to the demand (supply) shock. With sticky wages core inflation falls (rises) in response to the demand (supply) shock. Impulse response functions from a VAR estimated with post-1986 U.S. data show minimal movement in core inflation in response to both shocks. The federal funds rate rises (falls) in response to the demand (supply) shock, consistent with the predictions from the theoretical model for policy that stabilizes core inflation.     

Carbon option price forecasting based on modified fractional Brownian motion optimized by GARCH model in carbon emission trading

With the rapid growth of carbon trading, the development of carbon financial derivatives such as carbon options has become inevitable. This paper established a model based on GARCH and fractional Brownian motion (FBM), hoping to provide reference for China's upcoming carbon option trading through carbon option price forecasting research. The fractal characteristic of carbon option prices indicates that it is reasonable to use FBM to predict option prices. The GARCH model can make up for the lack of fixed FBM volatility. In this paper, the daily closing prices of EUA option contracts on the European Energy Exchange are selected as samples for price prediction. The GARCH model was used to determine the return volatility, and then the FBM was used to calculate the forecast price for the next 60 days. The results showed that the predicted price can better fit the actual price. This paper further compares the price prediction results of this model with the other three models through line graphs and error evaluation indicators such as MAPE, MAE and MSE. It is confirmed that the prediction results of the model in this paper is the closest to the actual price.     

Housing and the Korean economy

This paper explores the nexus between housing and the Korean economy. It starts with an overview of the size, growth, and volatility of residential investment in conjunction with long-term resource allocation and short-term macroeconomic fluctuations. Then, the evolution of housing finance and its implications for recent house price run-up are discussed. The relationships among housing price, consumer spending, and inflation are also investigated. Particular attention is paid to the debate over house price bubbles, housing wealth effects on consumption, and the causality between house price and inflation. The paper concludes with a brief assessment of government intervention to stabilize house prices.     

The New Keynesian Phillips curve with myopic agents

Empirical estimations of the New Keynesian Phillips curve support hybrid versions with a positive weight on lagged inflation and a weight less than one on expected inflation. We argue that myopic price setting of some agents explains the low weight on expected inflation. The lagged term can be explained by trend extrapolation if information about the future is costly. In a laboratory experiment we implement the Calvo (1983) microfoundations of the Phillips curve. Our hypotheses are supported by the experimental data. About half of the subjects set optimal Calvo prices while about a third is myopic.     

Prices and wages

The early part of 2014 has seen a further slowdown in inflation, with the CPI rate falling to 1.6% in March, the slowest pace since late‐2009. Sliding petrol and energy prices have played a significant role in the decline, as has the cooling in food price inflation. The impact of higher university fees has also eased relative to a year ago, further pulling down on the headline rate…     

Behavior of the firm under rate-of-return regulation with two capital inputs

Traditional electric utility companies face a trade-off between building generation facilities that utilize renewable energy (RE) and non-renewable energy (non-RE). The firm's input decision to build capacity for either source depends on several constraining factors, including input prices, policies that promote or discourage RE use, and the type of regulation faced by the firm. This paper models the utility company's decision between RE and non-RE capital inputs. From the model, we derive the result that rate-of-return (ROR) regulation decreases the investment in RE capital relative to the unregulated firm. These findings suggest restructuring electricity generation markets, which removes the ROR on generating assets, can increase the relative use of RE. A second result of the model shows that the renewable portfolio standard (RPS) increases the investment in capital that requires RE as a source of electricity, as expected. This paper contributes to the literature on the substitution between renewable and non-renewable resources, by examining the policies that affect the investment in the two types of technologies. The model can also be applied to other regulated utilities, such as water or natural gas companies, with outputs that are produced from different types of capital.     

House Prices, Housing Investment and Demography Forecasts from the LBS/Abbey National Model of the UK Housing Market

A new housing sector has been incorporated into the London Business School model. This article outlines the new housing model, summarizes the research which has gone into its construction, and presents a forecast of the UK housing market. Using the new housing model, we forecast a moderate recovery in the housing market in the later part of 1991 and 1992. This recovery is however short-lived and does not result in such high rates of house price increase as previous house price booms (Chart 1).
Cuts in interest rates following entry to the exchange rate mechanism of the EMS prompt a recovery in house prices from the middle of 1991. House price inflation then peaks with an increase in average UK house prices in 1992 of 11 per cent over the previous year. Increases in real personal disposable income are modest, by the standards of the 1980s, and for this reason the recovery does not develop the momentum of previous house price booms. House price inflation moderates again in 1993 falling back to around 7 per cent. Housing starts and housing investment recover only slightly from their present depressed levels.
the recovery in house prices is weaker than that foreseen in our April Forecast Release. This is because real personal disposable income is now forecast to grow more slowly during 1991. Sterling's membership of the ERM is followed by a fall in interest rates, but it is the timing of interest rate cuts rather than their magnitude which differs from the earlier forecast. The changed profile of interest rates has altered the house price forecast only marginally.     

HOUSE PRICES AND THE ECONOMY

UK house prices more than doubled from 1985 until 1989, with house price inflation over the previous year peaking at 34 per cent in the fourth quarter of 1988. The ratio of house prices to average incomes reached levels which surpassed even those experienced during the 1972-73 house price boom. This sharp increase in housing wealth has been a major factor in the fall in the savings ratio over the past three years. This forecast release examines the prospects for future house price movements, discusses the sources of the recent house price boom and finally considers the possible impact on consumer expenditure.     

Do house price developments spillover across euro area countries? Evidence from a global VAR

This paper empirically assesses the prospects for house price spillovers in the euro area, where co-movement in house prices across countries may be particularly relevant given a general trend with monetary union toward increasing linkages in trade, financial markets, and general economic conditions. A global VAR is estimated for three housing demand variables (real house prices, real per capita income, and the cost of borrowing, captured by a real long-term interest rate) on the basis of quarterly data for 7 euro area countries (Belgium, Germany, Ireland, Spain, France, Italy and the Netherlands), which together comprise nearly 90% of euro area GDP, over the period 1971–2009. The results suggest limited house price spillovers in the euro area, albeit with evidence of some overshooting in the first year after the shock, followed by a long run aggregate euro area impact of country-specific changes in real house prices related in part to the country’s economic weight. This contrasts with the impacts of a shock to domestic long-term interest rates, causing a permanent shift in house prices after 2–3 years. Underlying this aggregate development are rather heterogeneous house price spillovers at the country level, with a strong importance for weights – either economic or geographic – in governing their general magnitude. More generally, the impact of financing costs on house prices appears to have grown though time.     

Price and interest rate dynamics induced by multiperiod contracts

This paper suggests a mechanism by which nominal price rigidities can create a transmission mechanism for monetary shocks through relative price distortions in an economy with both spot and contract markets. The globally unique equilibrium time path of interest rates and prices following an impulse shock to the money supply is characterized. The model predicts that prices and interest rates cycle around the new steady state, with real interest rates initially falling and prices overshooting in the case of a positive shock. The volatility of spot prices and interest rates exceeds that of contract prices.