Do Central Bank Forecasts Influence Private Agents? Forecasting Performance versus Signals

Focusing on a set of central banks that publish inflation forecasts in real time, this paper aims to establish whether central bank inflation forecasts influence private inflation forecasts. The response is positive in the five countries studied: Sweden, the United Kingdom, Canada, Switzerland, and Japan. Three hypotheses may explain this central bank influence: central bank forecasts are more accurate than private ones, are based on different information sets, and/or convey signals about future policy decisions and policymakers’ preferences and objectives. We provide evidence that the source of these central banks’ influence is not linked to their forecasting performance.     

The International Dimension of Inflation: Evidence from Disaggregated Consumer Price Data

We estimate the contribution of international common factors to the dynamics of price inflation rates of a cross-section of 948 CPI products in four OECD countries: United States, Germany, France, and United Kingdom. We find two main results. First, on average, and at least in the sample 1991–2004, one international common factor explains between 15% and 30% of the variance of consumer prices (depending on the transformation applied to the data). Given the high level of disaggregation of our panel, this estimate is best viewed as a lower bound for the contribution of international factors to inflation dynamics. Second, we find a strongly positive and statistically significant relationship between exposure of consumer inflation to international shocks and trade openness at the sectoral level. The latter result holds regardless of whether the original data are expressed in local as opposed to common currency.     

Discretionary monetary policy and the zero lower bound on nominal interest rates

Ignoring the existence of the zero lower bound on nominal interest rates one considerably understates the value of monetary commitment in New Keynesian models. A stochastic forward-looking model with an occasionally binding lower bound, calibrated to the U.S. economy, suggests that low values for the natural rate of interest lead to sizeable output losses and deflation under discretionary monetary policy. The fall in output and deflation are much larger than in the case with policy commitment and do not show up at all if the model abstracts from the existence of the lower bound. The welfare losses of discretionary policy increase even further when inflation is partly determined by lagged inflation in the Phillips curve. These results emerge because private sector expectations and the discretionary policy response to these expectations reinforce each other and cause the lower bound to be reached much earlier than under commitment.     

Alternative Forms of Mixing Banking with Commerce: Evidence from American History

Much of the discussion about banking and commerce in America has failed to make several crucial distinctions and has not accounted for many arrangements that have promoted the mixing of these activities. We investigate the history of banking and commerce in the United States, looking both at bank control of commercial firms and commercial firms' control of banks. We trace how these controls have changed with shifting definitions of "bank" and changing methods of "control." Despite the regulations prohibiting some arrangements that promote financial control, we find evidence of extensive linkages between banking and commerce in the United States. These linkages usually build on devices that are very close substitutes to the arrangements prohibited by law. Altogether, our findings question the often made claim that traditionally banking in the United States has been separated from commerce. Furthermore, given that research on Japan and Germany has shown that the mixing of banking and commerce matters for a variety of issues, our evidence also raises some questions on similar research in the United States which makes the simplifying assumption that these industries are separated.     

What Makes the Output–Inflation Trade‐Off Change? The Absence of Accelerating Deflation in Japan

It is standard to model the output–inflation trade-off as a linear relationship with a time-invariant slope. We assess empirical evidence for two sets of theories that allow for endogenous variation in the slope of the short-run Phillips curve. At an empirical level, we examine why large negative output gaps in Japan in the late 1990s did not lead to accelerating deflation but instead coincided with stable, albeit moderately negative inflation. Our results suggest that this episode is most convincingly interpreted as reflecting a gradual flattening of the Phillips curve. We find that this flattening is best explained by models with endogenous price durations. These models imply that in any economy where trend inflation is substantially lower (or substantially higher) today than in past decades, time variation in the slope of the Phillips curve has become too important to ignore.     

Does Money Matter in Shaping Domestic Business Cycles? An International Investigation

We study the contribution of money to business‐cycle fluctuations in the United States, the United Kingdom, Japan, and the euro area using a small‐scale structural monetary business cycle model. Constrained likelihood‐based estimates of the parameters are provided and time instabilities analyzed. Real balances are statistically important for output and inflation fluctuations. Their contribution changes over time. Models giving money no role provide a distorted representation of the sources of cyclical fluctuations, of the transmission of shocks, and of the events of the last 40 years.     

Inflation risk and international asset returns

We show that inflation risk is priced in international asset returns. We analyze inflation risk in a framework that encompasses the International Capital Asset Pricing Model (ICAPM) of Adler and Dumas (1983). In contrast to the extant empirical literature on the ICAPM, we relax the assumption that inflation rates are constant. We estimate and test a conditional version of the model for the G5 countries (France, Germany, Japan, the UK, and the US) over the period 1975–1998 and find evidence of statistically and economically significant prices of inflation risk (in addition to priced nominal exchange rate risk). Our results imply a rejection of the restrictions imposed by the ICAPM. In an extension of our analysis to 2003, we show that even after the termination of nominal exchange rate fluctuations in the euro area in 1999, differences in inflation rates across countries entail non-trivial real exchange rate risk premia.     

Inflation targeting: What inflation rate to target?

In an economy with nominal rigidities in both an intermediate good sector and a finished good sector, and thus with a natural distinction between CPI and PPI inflation rates, a benevolent central bank faces a tradeoff between stabilizing the two measures of inflation, a final output gap and, unique to our model, a real marginal cost gap in the intermediate sector, so that optimal monetary policy is second-best. We discuss how to implement the optimal policy with minimal information requirement and evaluate the robustness of these simple rules when the central bank may not know the exact sources of shocks or nominal rigidities. A main finding is that a simple hybrid rule under which the short-term interest rate responds to CPI inflation and PPI inflation results in a welfare level close to the optimum, whereas policy rules that ignore PPI inflation or PPI sector shocks can result in significant welfare losses.     

The economics of options-implied inflation probability density functions

Recently a market in options based on consumer price index inflation (inflation caps and floors) has emerged in the US. This paper uses quotes on these derivatives to construct probability densities for inflation. We study how these probability density functions respond to news announcements and find that the implied odds of deflation are sensitive to certain macroeconomic news releases. We also estimate empirical pricing kernels using these option prices along with time series models fitted to inflation. The options-implied densities assign considerably more mass to extreme inflation outcomes (either deflation or high inflation) than do their time series counterparts. This yields a U-shaped empirical pricing kernel, with investors having high marginal utility in states of the world characterized by either deflation or high inflation.     

美联储停止缩表的原因、影响及中国对策

近期美联储停止缩表引起广泛关注。美联储停止缩表主要有以下几个原因：一是货币需求大幅上升,二是美联储控制短期利率的能力出现下降,三是美国经济前景存在不确定性。此外,美联储停止缩表还有助于继续发挥财政作用、改善货币政策传导效率、降低污名效应、降低私人部门安全资产的供应以及降低对美联储信用风险和银行清算风险。美联储停止缩表对美国和中国都会产生十分广泛的影响。对美国的影响主要有：资产价格将获得支撑、投资可能出现过热、通胀可能出现阶段性上升、金融风险可能加大、美联储独立性可能受到影响、可能加剧收益率曲线倒挂;对中国的影响主要有：人民币汇率压力有望缓解、资产价格可能上升、短期资本流入可能增多。因此,中国货币政策应保持定力,密切关注国际资本流动趋势的变化,防范资产价格暴涨风险,同时,应加强人民币汇率风险管理。     

Moderate Inflation and the Deflation–Depression Link

Recent research has concluded that the historical evidence only provides weak support for the contention that deflation episodes are harmful to economic growth. In this paper, we revisit this relationship by allowing for inflation and growth to have a nonlinear specification dependent on inflation levels. In particular, we allow for the possibility that high inflation is negatively correlated with growth, while a positive relationship exists over the range of negative to moderate inflation. Our results confirm a positive relationship between inflation and growth at moderate inflation levels, and support the contention that the relationship between inflation and growth is nonlinear over the entire sample range.     

Inflation Dynamics When Inflation Is Near Zero

We discuss the likely evolution of U.S. inflation in the near and medium terms on the basis of (i) past U.S. experience with very low levels of inflation, (ii) the most recent Japanese experience with negative inflation, and (iii) some preliminary U.S. micro evidence on downward nominal wage rigidity. Our findings question the view that stable long‐run inflation expectations and downward nominal wage rigidity will necessarily provide sufficient support to prices to avoid further declines in inflation. We show that an inflation model fitted on Japanese data over the past 20 years, which accounts for both short‐ and long‐run inflation expectations, matches the recent U.S. inflation experience quite well. While the model indicates that U.S. inflation might be subject to a lower bound, it does not rule out a prolonged period of low inflation or even mild deflation going forward. In addition, micro‐level data on wages suggest no obvious downward rigidity in the firm's wage bill, downward rigidity in individual wages notwithstanding. As a consequence, downward nominal wage rigidity may not be enough to offset deflationary pressures in the current situation.     

MEASURING LIMITS OF ARBITRAGE IN FIXED‐INCOME MARKETS

An emerging literature relies on an index of limits of arbitrage in fixed‐income markets. We analyze the benefits of an index that is model‐free, robust, and intuitive. This new index strengthens the evidence that limits of arbitrage proxy for risks priced in the cross‐section of returns. Trading simulations show that the new index improves identification of limits of arbitrage because it bypasses a noisy estimation step. Relative value indices in the United States, United Kingdom, Japan, Germany, Italy, France, Switzerland, and Canada exhibit strong commonality and high correlations with local volatility and funding conditions. The indices are updated regularly and available publicly.     

Risk Premiums in Dynamic Term Structure Models with Unspanned Macro Risks

This paper quantifies how variation in economic activity and inflation in the United States influences the market prices of level, slope, and curvature risks in Treasury markets. We develop a novel arbitrage‐free dynamic term structure model in which bond investment decisions are influenced by output and inflation risks that are unspanned by (imperfectly correlated with) information about the shape of the yield curve. Our model reveals that, between 1985 and 2007, these risks accounted for a large portion of the variation in forward terms premiums, and there was pronounced cyclical variation in the market prices of level and slope risks.     

Monetary policy and the twin crises

After presenting a brief overview of the recent financial crisis and the European debt crisis that followed in its wake, this paper goes on discuss monetary policy in the United States, the United Kingdom and the Euro bloc prior to and during the course of the two crises. The paper presents historical evidence for the three areas on the relationships linking the volatilities of output, inflation and monetary growth. In all three these relations are strongly positive. There is, therefore, no tradeoff between inflation and output volatility; the two move up and down together. Both, moreover, move up and down with the volatility of monetary growth. Viewed from this perspective, the increased volatilities of money supplies and the monetary base in the United States, the United Kingdom and the Euro bloc over the last half decade pose problems.     

Was It Real? The Exchange Rate-Interest Differential Relation over the Modern Floating-Rate Period

In this paper, we explore the relationship between real exchange rates and real interest rate differentials in the United States, Germany, Japan, and the United Kingdom. Contrary to theories based on the joint hypothesis that domestic prices are sticky and monetary disturbances are predominant, we find little evidence of a stable relationship between real interest rates and real exchange rates. We consider both in-sample and out-of-sample tests. One hypothesis that is consistent with our findings is that real disturbances (such as productivity shocks) may be a major source of exchange rate volatility.     

Testing Commitment Models of Monetary Policy: Evidence from OECD Economies

Inflation in many Organisation for Economic Co-operation and Development (OECD) countries was low in the 1960s, rose for a time before peaking in the 1970s or early 1980s, and then fell back to initial levels. This paper shows that a simple time inconsistency model of monetary policy does not explain OECD inflation outcomes, except in the United States. The hypothesis that time inconsistency mattered only in earlier decades fits the data no better than the baseline model. We find some, albeit limited support for a model in which inflation spills over from the United States into other countries as a result of exchange rate targeting.     

Dynamics of Persistence in International Inflation Rates

Characteristics of inflation play a key role in policy formulation and market analysis. Several studies have analyzed inflation persistence and reached diverging conclusions. In this paper, we investigate the dynamics of inflation persistence using fractionally integrated processes and find that there has been a clear decline in inflation persistence in the United States over the past two decades. We also show that the presence of fractional integration in inflation successfully explains previous diverging results. Lastly, we provide some international comparisons to examine the extent to which there has been a commensurate decline in inflation persistence in the other G7 economies.     

Inflation Persistence, Monetary Policy, and the Great Moderation

There is growing evidence that the empirical Phillips curve within the United States has changed significantly since the early 1980s. In particular, inflation persistence has declined sharply. This paper demonstrates that this decline is consistent with a standard dynamic New Keynesian (DNK) model in which: (i) the variability of technology shocks has declined and (ii) the central bank more aggressively responds to inflation.     

An examination of real interest rates in the United States, Canada, France, and Germany during the recent floating exchange rate period

This study reexamines the international linkage of ex-ante real interest rates using the theory of cointegrated processes. The univariate unit root tests suggest the existence of a nonstationary real interest rate in the United States, Canada, and (the former) West Germany. An ex-ante real interest rate is obtained by subtracting estimates of inflation from the nominal interest rate. The expected inflation rates are obtained by modeling changes in monthly CPI values as autoregressive moving average (ARMA) processes. A multivariate test for unit roots indicates that there are two cointegrating vectors, or one common stochastic trend, for the system of three nonstationary real interest rates. In addition, the log-likelihood ratio test fails to reject the null hypothesis that, in the long run, real interest rates in the United States are equal to those in Canada and West Germany.