On illiquidity of an emerging sovereign bond market

This study offers an analysis of a sovereign bond market in an emerging country, Turkey, and its illiquidity. We employ the Nelson-Siegel model to generate a term structure for interest rates directly from daily bond price quotes in the Turkish market. We take the noise measure, which is the byproduct of term structure estimation, as a proxy for market-wide illiquidity. Our results show that this noise measure can capture the illiquidity in the Turkish fixed-income market from global financial turbulence as well as local dynamics. Inflation uncertainty and sentiment are the major macro drivers of liquidity crunches. It has also become clear that liquidity in an emerging market such as Turkey in the aftermath of the 2008 crisis has been driven by global forces, however, since 2013 local factors have taken over. This apparent decoupling in liquidity between a major emerging market and global markets followed the approaching end of quantitative easing and a rise in economic turbulence in the country since then.     

Are commodity futures a hedge against inflation? A Markov-switching approach

This study examines the inflation hedging ability of various commodity futures using Markov-switching vector error correction models (MS-VECM). We find that total commodity futures fail to provide a hedge against inflation over the sample period between January 1983 and December 2021. However, industrial metals and precious metals are able to hedge against inflation. Other sub-indexes, including energy, agriculture, and livestock, do not have a significant inflation hedging ability. The inflation hedging capacity of industrial metals exhibits substantial variation over time, with most of the inflation hedging power occurring during the relatively longer and more common regimes covering the Great Moderation, the post-subprime crisis, and the periods after the outbreak of the COVID-19 pandemic. We further evaluate the inflation hedge ability of commodity futures by including stocks and bonds in the model. Our results suggest that industrial metals are more reliable inflation hedges.     

Socio-political instability and growth dynamics

We develop an overlapping generations (OLG) monetary endogenous growth model characterized by socio-political instability, with the latter being specified as a fraction of output lost due to strikes, riots and protests. We show that growth dynamics arise in this model when socio-political instability is a function of inflation. In particular, two distinct growth dynamics emerge, one convergent and the other divergent contingent on the strength of the response of socio-political instability to inflation. Since our theoretical results hinge on socio-political instability being a function of inflation, we test the prediction that inflation affects socio-political instability positively by using a panel of 156 countries for the 1980–2012 period, and allowing for country and time fixed effects. The results indicate that inflation relates positively with socio-political instability. Policy makers should be cognisant that it is crucial to maintain long-run price stability, as failure to do so may result in high inflation emanating from excessive money supply growth, leading to high (er) socio-political instability, and ultimately, the economy being on a divergent balanced growth path.     

Empirically-transformed linear opinion pools

The linear opinion pool (LOP) produces potentially non-Gaussian combination forecast densities. In this paper, we propose a computationally convenient transformation for the LOP to mirror the non-Gaussianity exhibited by the target variable. Our methodology involves a Smirnov transform to reshape the LOP combination forecasts using the empirical cumulative distribution function. We illustrate our empirically transformed opinion pool (EtLOP) approach with an application examining quarterly real-time forecasts for U.S. inflation evaluated on a sample from 1990:1 to 2020:2. EtLOP improves performance by approximately 10% to 30% in terms of the continuous ranked probability score across forecasting horizons.     

Nowcasting food inflation with a massive amount of online prices

The consensus in the literature on providing accurate inflation forecasts underlines the importance of precise nowcasts. In this paper, we focus on this issue by employing a unique, extensive dataset of online food and non-alcoholic beverages prices gathered automatically from the webpages of major online retailers in Poland since 2009. We perform a real-time nowcasting experiment by using a highly disaggregated framework among popular, simple univariate approaches. We demonstrate that pure estimates of online price changes are already effective in nowcasting food inflation, but accounting for online food prices in a simple, recursively optimized model delivers further gains in the nowcast accuracy. Our framework outperforms various other approaches, including judgmental methods, traditional benchmarks, and model combinations. After the outbreak of the COVID-19 pandemic, its nowcasting quality has improved compared to other approaches and remained comparable with judgmental nowcasts. We also show that nowcast accuracy increases with the volume of online data, but their quality and relevance are essential for providing accurate in-sample fit and out-of-sample nowcasts. We conclude that online prices can markedly aid the decision-making process at central banks.     

COVID-19 policy actions and inflation targeting in South Asia

In this paper, we examine the impact of policy actions undertaken by governments during the COVID-19 pandemic on Consumer Price Index (CPI) in five major South Asian nations, namely, Bangladesh, India, Nepal, Pakistan and Sri Lanka. Using panel fixed effects regression with robust standard errors, we show the relative importance of monetary and financial interventions on reducing CPI while fiscal interventions, direct grants and aid are insignificant. Further, delving into nature of policy interventions, our study finds evidence of negative impact of Credit Support, and Healthcare Support on CPI in South Asian nations. While our investigation is preliminary, it provides insights into additional understanding of effectiveness of policy actions on inflation targeting.