On the time-varying nature of the debt-growth nexus: evidence from the euro area

This article uses the DCC-generalized autoregressive conditional heteroskedasticity model to investigate the existence of time-varying correlations between public debt and economic growth. To that end, we use annual data from both central and peripheral countries of the euro area for the period 1961–2015. The results suggest that the relationships between these variables are time-varying and that in some countries and for some periods, there is a positive association between them.     

New technologies and productivity growth in the euro area

This paper provides an overview of the available evidence on the importance of information and communication technologies (ICT) for developments in average labour productivity (ALP) growth in the euro area. The contribution of ICT to ALP growth is found to have increased both in terms of production and investment over the 1990s (up to 2001). However, there is no evidence of significant positive spillover effects from the use of ICT on ALP growth. This implies that there is no reason to believe that potential output growth in the euro area has increased significantly in recent years on account of new technologies. Comparing developments in the euro area and the United States, it appears, however, that ICT capital cannot account for much of the difference in ALP developments over the 1990s. This suggests that cyclical developments and, in particular, the structure of the economy are more important for explaining the difference in performance.First version received: March 2002/Final version received: May 2003We thank Bart van Ark, Neale Kennedy, Gerard Korteweg, Ad van Riet, Marcel Timmer, two anonymous referees and participants at the 17th Congress of the European Economic Association, Venice August 2002 for their comments. All errors and omissions remain ours, of course. We thank Erikos Velissaratos for his help in acquiring data on investment in ICT and Colin Webb for providing us with the OECD STAN database. This paper represents the views of the authors and does not necessarily reflect the views of the European Central Bank, the European Commission or their staff.     

Nonlinearity and stationarity of inflation rates: evidence from the euro-zone countries

Earlier studies hardly reject the hypothesis of a unit root in inflation. Few studies have examined the possibility of nonlinearity in inflation and tested nonlinear stationarity of the inflation rates. This study thus intends to fill the gap. This study utilizes the tests for nonlinearity along with the unit root tests that allow for nonlinearity in the variables to examine the stationarity of inflation rates of 12 European countries that formed the Euro Zone (EZ) later in the sample period. The results suggest that the majority of these countries’ inflation rates can be characterized by mean reversion during the floating exchange rate period. Many of them appear to be nonlinear stationary. This finding is essential in conducting applied economic studies for these countries, when constructing models whose validity relies on whether or not inflation is stationary. The results of this study also imply that shocks to inflation have a transitory effect on inflation in the euro area. Therefore, it would be less costly in exercising the policies of disinflation for the monetary authorities of the euro area than for those of the countries with nonstationary inflation.     

Perceived inflation and the euro: Evidence from an Austrian survey

This paper employs an Austrian micro-dataset to analyze why inflation perceptions became disconnected from official inflation measures in the course of the euro cash changeover. We find evidence that persons who are more often confronted with prices, who expected price increases and who mentally convert euro prices into old currency prices when making price comparisons have a significantly higher perception of inflation. Furthermore, our results indicate that the latter two factors have a persistent impact. This contributes in explaining why price perceptions have not normalized for several years in some countries. The results suggest that policy measures in countries which are going to introduce the euro should address these issues in order to prevent a similar development as experienced in many euro area countries.     

Transitional price rises with the adoption of the euro: aggregate and disaggregate sector evidence

This paper presents a time‐series regression analysis of price inflation at the time of the euro currency changeover in January 2002. Cross‐equation tests on 12 euro countries and three non‐euro EU countries are used to identify significant price changes around that time. For a small number of product and service categories, positive price changes immediately after the euro changeover suggest the possible existence of menu costs, sellers' rounding up of prices or buyers' temporary rational inattention. However, the lack of evidence for reduced inflation immediately prior to the euro changeover suggests menu costs are not important.     

Inflation surprises and inflation expectations in the Euro area

In the second half of 2012, euro area inflation started declining and reached historical lows at the end of 2014. Market-based measures of inflation expectations also declined to unprecedented levels. During this disinflationary period, inflation releases have often surprised analysts on the downside. We provide evidence that inflation ‘surprises’ have significant effects on inflation expectations. The sensitivity of inflation expectations to the surprises, which has varied over time, disappeared after the introduction of the Asset Purchase Programme by the European Central Bank.     

The information content of the divisia monetary aggregates in forecasting inflation in the euro area

The paper investigates the performance of a set of monetary indicators, based on the Divisia money constructed for the euro area, on forecasting euro area inflation. The paper first briefly discusses on the relative information contents of the Divisia aggregates and the simple sum aggregates. The forecasting performance of the former is then examined by means of simulated out-of-sample forecasting. In addition to examining the information contents of the Divisia aggregate constructed for M3 money, the study also examines the performance of the Divisia M1 money to gain evidence on the relative performance between the broad and narrow Divisia monetary aggregates. According to the results, only some of the monetary indicators considered can significantly improve the univariate inflation forecasts. The Divisia M3 money based monetary indicators turned out to perform better than their Divisia M1 based counterparts. The result contradicts some previous evidence on the optimal level on monetary aggregation in the context of broad versus narrow money.      

The relevance and relative robustness of sources of inflation bias in Pakistan

We empirically examine the relevance and relative robustness of stabilization and non-stabilization sources of inflation bias for the typical discretionary monetary policy strategy of Pakistan. First, the stabilization and non-stabilization sources of inflation bias are identified, and their proxy variables are constructed. Second, a robustness evaluation strategy is developed based on bivariate and multivariate analysis of cointegrating relationships among inflation bias indicators and potential sources thereof to determine their long-term relevance and relative robustness or fragility. The stabilization sources of inflation bias such as exploitation of the inflation output trade-off for growth stimulation and the central bank’s preference for growth stabilization are the most relevant and relatively robust sources of inflation bias vis-à-vis the non-stabilization sources. Among the non-stabilization sources, only openness is partially relevant but is fragile.     

Measures of underlying inflation in the euro area: assessment and role for informing monetary policy

The paper evaluates the 24-month-ahead inflation forecasting performance of various indicators of underlying inflation and structural models. Measures derived using the generalized dynamic factor model (GDFM) overperform other measures over the monetary policy horizon and are leading indicators of headline inflation. Trimmed means, although weaker than GDFM indicators, have good forecasting performance, while indicators by permanent exclusion underperform but provide useful information about short-term dynamics. The forecasting performance of theoretically-founded models that relate monetary aggregates, the output gap, and inflation improves with the time horizon but generally falls short of that of the GDFM. A composite measure of underlying inflation, derived by averaging the statistical indicators and the model-based estimates, improves forecast accuracy by eliminating bias and offers valuable insight about the distribution of risks.     

Asymmetric behavior of inflation differentials in the euro area: Evidence from a threshold unit root test

This paper tests the existence of persistent inflation rate differentials in the euro area by employing linear as well nonlinear unit root tests. Besides linear unit root tests, a two-regime threshold unit root test examines the conjecture that inflation rate differentials follow a nonlinear two-regime process towards a threshold, switching from the persistent regime to the transitory one and vice versa. The results imply that threshold nonlinearity is confirmed in 10 out of the 16 cases. However, we have found unit root regime-switching behavior only in six out of the 16 cases under investigation. This finding implies that these inflation rate differentials were persistent when they were low (regime 1), but transitory when they were high (regime 2). This asymmetric behavior can possibly be explained by the different degree of pressure exercised on governments, which is accompanied with different inflation rate differentials. On the contrary, despite the evidence of nonlinearity, the majority of the inflation rate differentials are found to be monotonically persistent. Our results have strong implications for policy makers. In particular, the documented persistency in the inflation rate differentials might have long-run costs in terms of price and macroeconomic stability.     

欧元区成员国通胀差异成因研究

在欧元区内部,不同国家之间的通胀率存在不容忽视的差别。欧元区各经济体间究竟为什么会存在差别如此之大的通胀率呢?什么因素及在多大程度上影响了通胀率的差异?文章从巴拉萨—萨缪尔森效应、价格的收敛效应、输入性通胀、本国要素市场结构差异、本国财政政策和经济周期等六个方面,使用实证数据和面板数据回归探讨了这些问题。     

Business investment in euro area countries: the role of institutions and debt overhang

The recovery of business investment in the euro area has been sluggish, thereby hampering aggregate demand in the short term and potential growth in the long run. While we show that business investment can be associated to cost and supply of credit, cyclical demand conditions and economic uncertainty. But we also find evidence of additional factors. We suggest that there exists a link between excess leverage and weak economic institutions on the one hand and subdued investment growth on the other hand. Moreover, in euro area countries with both larger excess leverage and weaker economic institutions, the link with business investment is found to be stronger. The link between investment and weak institutions or excess leverage highlights the importance of structural reforms aimed at easing business regulations, reducing administrative burdens and increasing the efficiency of insolvency frameworks. These reforms are thus expected to reduce distortions in the allocation of resources and be supportive of a smoother deleveraging process, hence fostering business investment.     

The natural rate of interest and the output gap in the euro area: a joint estimation

The notion of a natural real rate of interest, due to Wicksell (Interest and prices. Macmillan, London Translation of 1898 edition, 1936), is widely used in current central bank research. The idea is that there exists a level at which the real interest rate would be compatible with output at its potential level and stationary inflation. Such a concept is of primary concern for monetary policy because it provides a benchmark for the monetary policy stance. This paper applies the method suggested by Laubach and Williams (Rev Econ Stat 85(4):1063–1070, 2003) to jointly estimate the natural real interest rate and the output gap in the euro area using data from 1960 onwards. Our results suggest that the natural real rate of interest has declined gradually over the past 40 years. They also indicate that monetary policy in the euro area was on average stimulative during the 1960s and the 1970s, while it contributed to dampen the output gap and inflation in the 1980s and 1990s. The views expressed in this paper are those of the authors and do not necessarily reflect the opinions of the institutions to which they are affiliated. We are grateful to Siem Jan Koopman for very helpful suggestions and comments. We also thank P. Cour-Thimann, V. Curdia, F. Drudi, S. McCaw, D. Rodriguez-Palenzuela, R. Pilegaard, H. Pill, L. Stracca, T. Laubach, J. C. Williams and the participants of an ECB workshop on natural interest rates.     

Sectoral variability and the foundations of optimal inflation rate

The recent monetary search models argue that the real effects of inflation on economic activity can be gauged through relative price variability (RPV). Our study uses a large panel data of 32 developed and emerging European economies to test the relationship between inflation and RPV. We use a panel threshold model to explore the regime-specific effects of inflation on RPV. Our results confirm a non-linear profile of the relationship between inflation and RPV. Consistent with the monetary search models, our results show that the effects of inflation on the RPV are more significant in its low (below 0.792% per annum) and high (beyond 2.064% per annum) regimes. Finally, we also report a strong moderating role of central bank independence (CBI) in the inflation–RPV relationship.     

试析人民币对外升值与对内贬值并存

Since 2002, RMB has shown a phenomenon which is the co-existence of the external appreciation and the domestic inflation. This new monetary phenomenon has been strengthened in the context that US dollar depreciates internationally and that domestic economy is overwhelmed with excessive liquidities. The new monetary phenomenon is the reflection of the real economy that continuing trade surplus, triggered robustly by the export-driven economy, which brings a huge amount of foreign exchange reserve and accelerates sequentially the expansion of domestic money supply. Furthermore, a refrained appreciation of RMB tends to deteriorate the domestic inflation, which is not simply a traditional concept of CPI but a broad inflation parameter including a variety of asset prices. It is sure that the new phenomenon is becoming a new challenge to the macroeconomic equilibrium as well as the decision maker of monetary policy. __________ Translated from Jingji yanjiu 经济研究 (Economic Research Journal), 2007, (9): 32–48     

中国通货膨胀的福利成本研究

Inflation is always an important indicator to measure whether economy is stable and healthy. This paper provides a substantive survey of the research on the welfare cost of inflation, and uses the methods of consumer’s surplus and neo-classical general equilibrium models respectively to estimate the welfare cost of inflation in China. The results show that high inflation will cause huge welfare cost in China, so keeping low inflation is beneficial to the entire economic welfare of China. __________ Translated from Jingji Yanjiu 经济研究 (Economic Research Journal), 2007, (4): 30–42, 159     

The feasibility of low inflation: theory with an application to the argentine case

In this paper we review the Argentine experience of hyperinflation, concentrating on understanding why stabilization took so long, and was only implemented by the most unlikely candidate. To explain these facts we present a voting model in which politicians' actions transmit information about the state of the economy and thus shape voters' behavior. We discuss the implications of the model for countries which are going through the same instability that characterized Argentina in the late 80s.     

The information content of market-based measures for the long-term inflation expectations of professionals: evidence from a midas analysis

Long-term inflation expectations taken from the Survey of Professional Forecasters are a major source of information for monetary policy. Unfortunately, they are published only on a quarterly basis. This article investigates the daily information content of market-based measures, such as inflation-linked swaps and breakeven inflation rates, for the next survey outcome. Using a mixed data sampling approach, we find that professionals account for the daily dynamics of market-based measures when they submit their long-term inflation expectations. We propose a daily indicator of professionals’ inflation expectations that outperforms alternative indicators that ignore the high-frequency dynamics of market-based measures. To illustrate the usefulness of the new indicator, we provide new evidence on the (re-)anchoring of U.S. inflation expectations.     

The dynamics of inflation: a study of a large number of countries

Over the last twenty years the statistical properties of inflation persistence has been the subject of intense investigation and debate without reaching a unanimous conclusion yet. In this article we attempt to shed further light to this debate using a battery of econometric techniques in order to provide robust evidence on the degree of inflation persistence and whether this has changed during the period in which several countries have followed inflation-targeting regimes or new monetary regimes. We consider the inflation rates of thirty developed and emerging economies using quarterly data for the period 1958 to 2007 which include alternative monetary policy regimes. The coefficient of the inflation parameter is estimated by Ordinary Least Squares (OLS), Autoregressive Moving Average (ARMA) and Autoregressive Fractionally Integrated Moving Average (ARFIMA) models. Furthermore, the grid-bootstrap Median Unbiased (MUB) estimator approach developed by Hansen (1999) is used to estimate the finite sample OLS estimates coupled with the 95% symmetric confidence interval. We also examine parameter stability of persistence coefficients by estimating a model with time-varying parameters.     

The reliability of real-time estimates of the euro area output gap

This paper provides evidence on the reliability of euro area real-time output gap estimates. A genuine real-time data set for the euro area is used, including vintages of several sets of euro area output gap estimates available from 1999 to 2010. It turns out that real-time estimates of the output gap tend to be characterised by a high degree of uncertainty, much higher than that resulting from model and estimation uncertainty only. In particular, the evidence indicates that both the magnitude and the sign of the real-time estimates of the euro area output gap are very uncertain. The uncertainty is mostly due to parameter instability and model uncertainty, while data revisions seem to play a minor role. Some euro area real-time measures, based on multivariate components models and capacity utilisation, are relatively less uncertain, but do not appear to be fully reliable along some dimensions. To benchmark our results, we repeat the analysis for the US over the same sample. It turns out that US real-time estimates tend to be revised to a lesser extent than euro area estimates. However, euro area real-time output gap estimates tend to display a higher correlation with the final estimates and the sign of the level of US real-time estimates tends to be revised more often compared to the corresponding euro area estimates. In addition, the data revision component of the revision error is larger for US estimates than for the euro area. Overall, the unreliability in real-time of the US output gap measures detected in earlier studies is confirmed in the more recent period.