Long-run impacts of inflation across sectors in a small sample of countries

This article investigates the long-run effects of inflation on economic output for 10 sectors of the economy, with a sample of 7 countries. The analysis is done using long-run restrictions in a vector autoregression and reports long-run multipliers with bootstrapped confidence bands. The results suggest that some sectors seem to be affected differently than others, as well as significant heterogeneity across countries. The results suggest the strongest effects in the low inflation countries Germany and Japan as has been found in similar studies. In contrast to research using growth regressions, the evidence suggests a positive long-run effect of inflation on output.     

Optimal long-run inflation with occasionally binding financial constraints

This paper studies the optimal long-run inflation rate in a simple New Keynesian model with occasionally binding collateral constraints that intermediate-good firms face on hiring labor. The paper finds that the optimal long-run annual inflation rate is around 1.5% if the economy is hit by a total factor productivity (TFP) shock and nearly 2.5% if the economy is subject to a markup shock. The shadow value of the collateral constraint is akin to an endogenous cost-push shock. Differently from usual cost-push shocks, however, this shock is asymmetric as it takes non-negative values only. Since the mean of this asymmetric endogenous cost-push shock is positive, inflation is also positive on average. In addition, a binding collateral constraint resembles a time-varying tax on labor, which the monetary authority can smooth by setting a positive inflation rate. More generally, the basic result is related to standard Ramsey theory in that optimal policy smoothes distortions over time.     

Inflation targets and endogenous wage markups in a New Keynesian model

Empirical contributions show that wage re-negotiations take place while expiring contracts are still in place. This is captured by assuming that nominal wages are pre-determined. As a consequence, wage setters act as Stackelberg leaders, whereas in the typical New Keynesian model the wage-setting rule implies that they play a Nash game. We present a DSGE New Keynesian model with pre-determined wages and money entering the representative household’s utility function and show how these assumptions are sufficient to identify an inverse relationship between the inflation target and the wage markup (and thus employment) both in the short and the long run. This is due to the complementary effects that wage claims and the inflation target have on money holdings. Model estimates suggest that a moderate long-run inflation rate generates non-negligible output gains.     

Aggregate price responses to wage and productivity changes: Evidence from the U.S.

This papei examines the dynamic responses of prices to wage and productivity changes and distinguishes between short-run and long-run effects. The long-run solution of the dynamic specification is consistent with the hypothesis of markup pricing over unit labour costs. The restrictions implied by this long-run behaviour are not rejected.by U.S. data. In addition, the evidence supports the view that the short-run wage effects are significantly stronger than productivity effects.     

Identifying fiscal inflation

Fiscal theorists warn about the risk of future inflation as a consequence of fiscal imbalances in the US. Because actual inflation remains historically low and data on inflation expectations do not corroborate such risks, warnings for fiscal inflation are often ignored in policy and academic circles. This paper shows that a canonical NK-DSGE model enables identifying an anticipated component of inflation expectations that is closely related to fiscal policy. Estimation results suggest that fiscal inflation concerns have induced a 1.6%-points increase in long-run inflation since 2001. The model also rationalizes why data on inflation expectations do not reveal such concerns outright.     

A Time Series Analysis of the Relationship between Inflation Uncertainty and Unemployment

This paper examines the empirical relationship between inflation uncertainty and unemployment rates. We find supportive evidence of a significant positive association between inflation uncertainty and unemployment, but this relationship depends critically on three factors. First, the inflation uncertainty-unemployment relationship is not significant before the mid-1970s. Second, the inflation uncertainty-unemployment relationship does not hold across all single digit SIC industries. And third, the inflation uncertainty-unemployment relationship is concentrated at business cycle and long-run components of the data, rather than high-frequency components.     

The long-run Phillips curve and non-stationary inflation

Modern theories of inflation incorporate a vertical long-run Phillips curve and are usually estimated using techniques that ignore the non-stationary behaviour of inflation. Consequently, the estimates obtained are imprecise and unable to test the veracity of a vertical long-run Phillips curve. We estimate a Phillips curve model taking into account the non-stationary properties in inflation and identify a small but significant positive relationship between inflation and unemployment. The results also provide some evidence that the trade-off between inflation and the rate of unemployment in the short-run worsens as the mean rate of inflation increases.     

On the determinants of long-run inflation uncertainty: Evidence from a panel of 17 developed economies

Based on a cross section of 17 advanced economies and data for the period 1975 to 2015, we examine how the interaction between monetary policy and macroeconomic conditions affects inflation uncertainty in the long-term. We construct a proxy for the unobservable inflation uncertainty based on the slowly evolving long-term variance component of inflation from a Spline-GARCH model (Engle and Rangel, 2008). We show that long-run inflation uncertainty is high if an inflation-tolerant central bank governor is in power during a period of high inflation, if the policy rate is below the one that is prescribed by the Taylor rule and during times of heightened stock and exchange rate volatility.     

On the short-run and long-run demand for money

This paper makes precise the relationships between short-run and long-run demand for money, using methods commonly employed in growth models. It estimates these demand functions with quarterly French data and tests the validity in France of the modern version of the quantity theory of money. The effects of inflation on the demand for money are studied both in the short run and the long run. The speed of adjustment of money balances towards their long-run level is measured.     

An examination of the Fisher Hypothesis: the case of Turkey

This study examines the famous Fisher Hypothesis (FH) for Turkey. FH asserts that nominal interest rates adjust on a one-to-one basis to expected changes in inflation rates. Using the Johansen cointegration method for the Turkish monthly interest rate and inflation rate data, we find that it is possible to determine the long-run relationship—but not the one-to-one basis—between nominal interest rates and inflation. Our findings suggest that full FH does not hold but there is a very powerfull Fisher effect in the case of Turkey from 1990 to 2003.     

The link between inflation and inflation uncertainty: Evidence from G7 countries

In this paper we adopt the Markov-switching heteroscedasticity model to analyse the inflation series for G7 countries and examine the interaction between inflation rate and its uncertainty over both the short- and long-run. It is found that the relationship between inflation and inflation uncertainty depends on whether the shock is permanent or transitory. The relationship also differs from country to country. High uncertainty about long-run inflation is associated with a significant positive shift in inflation for Canada, Germany, and Japan. High uncertainty about short-run inflation is associated with a significant positive shift in inflation for Germany and USA, and a significant negative shift in inflation for Canada. The modelling approach employed in this paper is empirically supported by various diagnostics including the Vuong test. We also derive the two components of the variance of inflation forecast for a particular forecast horizon. It is found that the inflation uncertainty increases at all horizons in the middle of 1970s and return to the low level in the middle of 1980s.First version received: June 2001/Final version received: October 2003We would like to thank three anonymous referees for many helpful comments and suggestions.     

A long-run,short-run,and politico-economic analysis of the welfare costs of inflation

The long-run, short-run, and politico-economic welfare implications of inflation are assessed in a Bewley model of money demand. All agents produce and consume every period, and hold money to self-insure against idiosyncratic risk. The model is calibrated so the equilibrium monetary distribution shares features with US data. The long-run welfare costs of inflation are shown to be large because inflation reduces the ability of money to mitigate risk. However, the beneficial redistributive effect of inflation is magnified along the short-run transition and reduces the overall costs. These short-run benefits result in a majority-rule inflation rate above the Friedman Rule.     

Monetary,fiscal, and structural drivers of inflation in Ethiopia: new empirical evidence from time series analysis

This study empirically investigates the drivers of inflation in Ethiopia using monthly data over the period July 1998 to September 2020. It explores short-run and long-run effects of domestic and external determinants of inflation—including demand-side, supply-side, and structural factors—using the cointegration and vector error-correction methodology. Four measures of inflation are considered: cereals, food, nonfood, and all-items Consummer Price Index (CPI) inflation. A key contribution to the existing literature is the investigation of the role of the fiscal sector in modeling inflation, a topic that has been neglected in the existing studies on inflation in Ethiopia. The empirical results show that disequilibria in the monetary sector, grains sector, and food markets have long-run effects on inflation. In the short run, inflation is driven by structural factors (notably, cereal output gaps and imported inflation) as well as demand-side factors (notably, money growth and public sector borrowing). The results hold when analysis is limited to the high growth period from 2005 onward, following the end of the International Monetary Fund (IMF) program in the country. The evidence provides valuable insights in the context of ongoing macroeconomic policy reforms in Ethiopia.     

The nexus between sectoral FDI and institutional quality: empirical evidence from Pakistan

This study investigates short- and long-run bidirectional causality between institutional quality and sectoral-level FDI in Pakistan by using the ARDL technique. The results confirm that long-run bidirectional causality exists between institutional quality and aggregate FDI. The in-depth sectoral-level FDI analysis substantiates the presence of long-run bidirectional causality between institutional quality and FDI in services and manufacturing sectors, while no long-run causality is observed between institutional quality and FDI inflows in primary sector. Furthermore, the results in the study reveal short-run bidirectional causality only between institutional quality and manufacturing FDI and report insignificant short-run causal link between institutional quality and FDI in primary and services sectors. The overall findings of the study suggest that in the long-run institutional quality attract FDI and FDI inflows, particularly to manufacturing and services sectors, significantly enhance the quality of institutions in Pakistan.     

Testing for fixity of the labour input under non competitive behaviour in Italian and French manufacturing

The flexibility in labour markets and the degree of competition in output markets are investigated in the context of the Italian and French manufacturing sectors. Conventional wisdom seems to point out that in countries with institutional constraints in the labour market it may not be easier to optimize over labour than over capital. We test whether labour is fixed starting with a measure of labour as total hours worked. As the hypothesis cannot be rejected, we do not proceed to test a further hypothesis, based on the measurement of labour as number of workers. We use a variable cost model supplemented with a markup pricing rule to allow for non competitive market structure. From the results it emerges that the output markets are non competitive. We derive analytically and provide a measurement of both short-run and intermediate-run markups. We also derive a measure of the long-run cost-minimizing level of labour: the ratio of optimal to actual level gives the degree of under- or over-utilization of labour.     

Is gold a hedge against inflation? New evidence from a nonlinear ARDL approach

This paper aims to study the role of gold as a hedge against inflation based on local monthly gold prices in China, India, Japan, France, the United Kingdom and the United States of America in periods ranging from 1955 to 2015. We extend the literature by using a novel approach with the nonlinear autoregressive distributed lags (NARDL) model (Shin et al., 2014). The main advantage of this model relies on its ability to simultaneously capture the short- and long-run asymmetries through positive and negative partial sum decompositions of changes in the independent variable(s). Moreover, we rely on local gold prices instead of those from London converted into local currencies like in most of previous studies. The results show that gold is not a hedge against inflation in the long run in all cases. In the short run, gold is an inflation hedge only in the UK, USA, and India. Furthermore, there is no long-run equilibrium between gold prices and the CPI in China, India and France. This difference may be due to traditional aspects of gold and custom controls for gold trade in these countries. Our robustness check suggests that the data time-frequency does not change the specification of the NARDL model but can change conclusions regarding the role of gold as a hedge against inflation in certain countries.     

Identifying domestic and imported core inflation

This paper estimates core inflation in Norway, identified as that component of inflation that has no long-run effect on GDP. The model distinguishes explicitly between domestic and imported core inflation. The results show that (domestic) core inflation is the main component of CPI inflation. However, CPI inflation misrepresents core inflation during some periods. The differences are well explained by the other shocks identified in the model, in particular the oil price shocks of the 1970s when Norway imported inflation, and the negative non-core (supply) shocks of the late 1980s, which pushed inflation up temporarily relative to core inflation.     

Inflation and the Income Share of the Rich: Evidence for 14 OECD Countries

This paper examines the distributional implications of inflation on top income shares in 14 advanced economies using data over the period 1920–2016. We use local projections to analyze how top income shares respond to an inflation shock, and panel regressions in which all variables are defined as 5-year averages to examine the impact of inflation on the position of the top-one-percent in the long run. Our findings suggest that inflation reduces the share of national income held by the top 1 percent. Furthermore, we find that inflation shocks and long-run inflation have similar effects on top income shares.     

Central Bank's interventions and the Fisher hypothesis: a threshold cointegration investigation

The long-run relationship between nominal interest rates and inflation is examined, allowing for structural breaks and asymmetric mean reversion. From a Threshold AutoRegressive (TAR) test applied to the residuals of the cointegration relationship (while allowing for both a break in the mean of the long-run equation and a smooth regime-transition), there is strong evidence for non-linear mean reversion properties for the real interest rates of the US Treasury Bill market. This suggests asymmetric changes to inflation shocks in the Central Bank's reaction function. The existence of different regimes is consistent with some interpretations of the monetary policies run by the Fed, such as credibility and opportunism.     

外商直接投资对农业进出口贸易的影响——基于1983～2004年中国数据的协整分析

针对我国当前进出口贸易发展迅速而农业贸易不容乐观的现实,文章从农业部门外商直接投资对农业进出口贸易的影响出发,通过采用1983~2004年的经济数据,对二者的关系进行了协整检验和格兰杰检验。结果发现,农业部门吸引外商直接投资和农业进出口贸易之间存在稳定的相关关系,即外商直接投资是引起农业进出口贸易的原因之一。我国为此应该采取相关对策,促进农业部门成为我国吸引外商直接投资的新领域。