A common trends model of UK core inflation

In this paper the long-run trend in RPI inflation (core inflation) for the UK over the 1961–1997 period is estimated within the framework of a multivariate common trends model which extends the bivariate VAR approach of Quah and Vahey (1995). In this context core inflation is directly linked to money and wage growth and interpreted as the long-run forecast of inflation from a small-scale, cointegrated macroeconomic system. First version received: September 1999/Final version received: October 2001 RID="*" ID="*"  We thank two anonymous referees for many helpful comments and suggestions. Work on this paper was partially conducted when C. Morana was at Heriot-Watt University.     

The negative side of inflation targeting: revisiting inflation uncertainty in the EMU

ABSTRACT

This article tests the Friedman–Ball hypothesis for the European Monetary Union (EMU) countries, using a GARCH methodology. The empirical results show a positive relationship between inflation and inflation uncertainty, largely supportive of the Friedman–Ball hypothesis. Furthermore, the ECB’s price stability mandate is found to have asymmetric, if not limited, effects on inflation uncertainty since 1999, with the findings different for the so-called peripheral countries when compared to the core. For the majority of the EMU countries, shifts away from the 2% target served to increase inflation uncertainty. The credibility of the ECB since the financial crisis, in attempting to meet its 2% inflation target has seen inflation uncertainty increase for some, likely driven by inflation failing to re-anchor. Furthermore, recent periods of deflation are found to generate inflation uncertainty, with short-term price variability increasing in line with observed negative price growth for the majority of the EMU countries. The results are supportive of a U-shaped relationship between inflation and inflation uncertainty. Using spline techniques, we formally provide support for such a U-shaped relation where inflation uncertainty broadly increases below a certain threshold for each country’s inflation rate. Asymmetric effects across countries are found in the level of this threshold.     

The time-varying effect of inflation uncertainty on inflation for Turkey

We investigate the effect of inflation uncertainty on inflation from January 1982 through March 2016 for Turkey by using the Stochastic Volatility in Mean model with time-varying parameters. Our empirical evidence from consumer price index (CPI) inflation suggests that the observed positive relationship between inflation and inflation uncertainty is not robust. This positive relationship diminishes after 2002. This finding is valid for all five subcomponents of CPI inflation; however, for Health Services, Transportation Services, and Recreational and Cultural Services, an inflation-positive association is reported after 2010.     

Assessing inflation expectations anchoring for heterogeneous agents: analysts,businesses and trade unions

Forecasts of agents who are actively involved in the setting of prices and wages are less readily available than those of professional analysts but may be more relevant for understanding inflation dynamics. Here we compare inflation expectations anchoring between analysts, businesses and trade unions for one country for which comparable forecasts are available for almost two decades: South Africa. Forecasts are modelled as monotonically diverging from an estimated long-run anchor point, or ‘implicit anchor’, towards actual inflation as the forecast horizon shortens. We find that the estimated inflation anchors of analysts lie within the 3–6 percent inflation target range of the central bank. However, those for businesses and trade unions, which our evidence suggests may be the most relevant for driving the inflation process, have remained above the top end of the official target range. Our results point to challenges for central banks seeking to gain credibility with agents whose decisions directly influence inflation.     

Stock prices,inflation and inflation uncertainty in the U.S.: testing the long-run relationship considering Dow Jones sector indexes

We test for the long-run relationship between stock prices, inflation and its uncertainty for different U.S. sector stock indexes, over the period 2002M7–2015M10. For this purpose we use a cointegration analysis with one structural break to capture the crisis effect, and we assess the inflation uncertainty based on a time-varying unobserved component model. In line with recent empirical studies we discover that in the long run, the inflation and its uncertainty negatively impact the stock prices, opposed to the well-known Fisher effect. In addition we show that for several sector stock indexes the negative effect of inflation and its uncertainty vanishes after the crisis outburst. However, in the short run the results provide evidence in favour of a negative impact of uncertainty, while the inflation has no significant influence on stock prices, except for the consumption indexes. The consideration of business cycle effects confirms our findings, which proves that the results are robust, both for long- and short-run relationships.     

我国通货膨胀率均值过程和波动过程中的双长记忆性度量与统计检验

This paper uses the ARFIMA-FIGARCH model to investigate the China’s monthly inflation rate from January 1983 to October 2005. It is found that both first moment and second moment of inflation have remarkable long memory, indicating the existence of long memory properties in both inflation level and inflation uncertainty. By the Granger-causality test on inflation rate and inflation uncertainty, it is shown that the inflation level affects the inflation uncertainty and so supports Friedman hypothesis. Therefore, as for policy maker, they should roundly concerns on long memory properties of inflation and inflation uncertainty, and their single-direction relationship between them. __________ Translated from Guanli shijie 管理世界 (Management World), 2007, (7): 14–21     

浅析当前我国通货膨胀产生的原因及对策分析

根据国家统计局公布的2011年一季度CPI数据,前两个月皆为4.9%,三月份的CPI数据国内各银行的首席经济学家预测亦不低于4.8%,约为4.9%～5.2%,接近5%的峰值。较高的通货膨胀已对国内经济的发展和人民的生活水平产生较大影响,缓解通货膨胀已成为我国经济面临的最重要的问题。     

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.     

Inflation targeting and inflation expectations in Mexico

In this article we analyse inflation expectations in Mexico. After a review of the theoretical and empirical literature, we apply unit root, normality and cointegration tests to the data provided by Banco de México (Banxico) in the Survey on the Expectations of the Private Sector Economics Specialists. Our results reject the null hypothesis of normality for inflation expectations over the period 2004:01–2011:12. The exchange rate has become one of the most relevant variables in the transmission mechanism of monetary policy in a small open economy. In this regard, we show the existence of a long-run relationship between nominal exchange rate and interest rate where inflation expectations matter for long-term dynamics.     

Inflation and inflation uncertainty in China

The study examines the relationship between inflation and inflation uncertainty in China using Generalized Autoregressive Conditional Heteroscedasticity model. Particularly, this link is investigated in China’s urban and rural sectors, motivated by the substantial urban–rural divide. The results provide strong statistical supportive evidence that higher inflation raises inflation uncertainty. On the other hand, evidence on the effect of inflation uncertainty on inflation is mixed depending on the sample periods and areas examined. The understanding of inflation-uncertainty nexus in China could provide implications to policymakers in the adoption of monetary policies.     

Ten-year forecasts of real stock price changes

This paper provides the strongest evidence to-date on the predictability of real stock prices over long horizons. Ex ante forecasts account for over two-thirds of the variation of the growth rate of real stock prices over ten year spans from 1940 through 2001. The paper forecasts negative growth rates of real stock prices over the next ten years. This bearish long-run outlook is buttressed by the long-run relationship between the growth rates of real stock prices, inflation, dividends, and productivity. First version received: June 2000/Final version received: June 2001 RID="*" ID="*"  Special thanks to an anonymous referee for helpful comments.     

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.     

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.     

What determines households inflation expectations? Theory and evidence from a household survey

The purpose of the present paper is to study how households form inflation expectations using a novel survey dataset of Italian households. We extend the existing ‘inattentiveness’ literature by incorporating explicitly inflation targets and distinguishing between aggregate and disaggregate dynamics based on demographic groups. We also consider both the short- and long-run dynamics as households update their inflation expectations. While we find clear distinctions between the various demographic groups behavior, households tend to absorb professionals forecast. The short-run dynamics also indicate they not only overreact when updating their expectations but also adjust asymmetrically to any perceived momentum change of future inflation.     

Forecasting UK consumer price inflation using inflation forecasts

The inflation rate is a key economic indicator for which forecasters are constantly seeking to improve the accuracy of predictions, so as to enable better macroeconomic decision making. Presented in this paper is a novel approach which seeks to exploit auxiliary information contained within inflation forecasts for developing a new and improved forecast for inflation by modeling with Multivariate Singular Spectrum Analysis (MSSA). Unlike other forecast combination techniques, the key feature of the proposed approach is its use of forecasts, i.e. data into the future, within the modeling process and extracting auxiliary information for generating a new and improved forecast. We consider real data on consumer price inflation in UK, obtained via the Office for National Statistics. A variety of parametric and nonparametric models are then used to generate univariate forecasts of inflation. Thereafter, the best univariate forecast is considered as auxiliary information within the MSSA model alongside historical data for UK consumer price inflation, and a new multivariate forecast is generated. We find compelling evidence which shows the benefits of the proposed approach at generating more accurate medium to long term inflation forecasts for UK in relation to the competing models. Finally, through the discussion, we also consider Google Trends forecasts for inflation within the proposed framework.     

The evolution of inflation expectations in Canada and the US

We model inflation forecasts as monotonically diverging from an estimated long‐run anchor point towards actual inflation as the forecast horizon shortens. Fitting the model with forecaster‐level data for Canada and the US, we identify three key differences between the two countries. First, the average estimated anchor of US inflation forecasts has tended to decline gradually over time in rolling samples, from 3.4% for 1989–1998 to 2.2% for 2004–2013. By contrast, it has remained close to 2% since the mid‐1990 for Canadian forecasts. Second, the variance of estimates of the long‐run anchor is considerably lower for the panel of Canadian forecasters than US ones following Canada's adoption of inflation targets. And third, forecasters in Canada look much more alike than those in the US in terms of the weight that they place on the anchor. One explanation for these results is that an explicit inflation‐targeting regime (Canada) provides for less uncertainty about future monetary policy actions than a monetary policy regime where there was no explicit numerical inflation target (the US before 2012) to anchor expectations.     

Flexible inflation forecast targeting: Evidence from Canada

We test whether the Bank of Canada pursues a flexible inflation forecast target, one that weights output growth as well as inflation. For the period 1996–2007, we find evidence that the Bank did effectively pursue such a target over the forecast horizon of 12 to 18 months. We find the relative weight that the Bank gives to output growth in its target to be positive and statistically significant within the range of 0.2 to 0.4.     

Long memory and level shifts: Re-analyzing inflation rates

A key application of long memory time series models concerns inflation. Long memory implies that shocks have a long-lasting effect. It may however be that empirical evidence for long memory is caused by neglecting one or more level shifts. Since such level shifts are not unlikely for inflation, where the shifts may be caused by sudden oil price shocks, we examine whether evidence for long memory (indicated by the relevance of an ARFIMA model) in G7 inflation rates is spurious or exaggerated. Our main findings are that apparent long memory is quite resistant to level shifts, although for a few inflation rates we find that evidence for long memory disappears. First version received: March 1998/final version received: October 1998     

Inflation and inflation uncertainty in the euro area

This article estimates a time-varying AR-GARCH model of inflation producing measures of inflation uncertainty for the euro area, and investigates their linkages in a VAR framework, also allowing for the possible impact of the policy regime change associated with the start of EMU in 1999. The main findings are as follows. Steady-state inflation and inflation uncertainty have declined steadily since the inception of EMU, whilst short-run uncertainty has stabilised. A sequential dummy procedure provides further evidence of a structural break coinciding with the introduction of the euro and resulting in lower long-run uncertainty. It also appears that the direction of causality has been reversed, and that in the euro period the Friedman-Ball link is empirically supported, consistently with the idea that the ECB can achieve lower inflation uncertainty by lowering the inflation rate.     

Price setting and the steady-state effects of inflation

This paper examines how price setting plays a key role in explaining the steady-state effects of inflation in a monopolistic competition economy with transactions-facilitating money. Three pricing variants (optimal prices, indexed prices, and unchanged prices) are introduced through a generalization of the Calvo-type setting that allows price indexation. We found that in an economy with less indexed prices, the steady-state negative impact of inflation on output is higher. Regarding welfare analysis, our results support a long-run monetary policy aimed at price stability with a close-to-zero inflation target. This finding is robust to any price setting scenario.JEL Classification: E13, E31, E50The writing of this paper commenced during the time I spent on the Research Visitors Programme 2001 of the European Central Bank and an earlier version of the paper became ECB Working Paper No. 140. I would like to thank Bennett T. McCallum, Frank Smets, and Oscar Bajo-Rubio for their valuable comments and suggestions, and the Ministerio de Ciencia y Tecnología of Spain for its financial support (Research Project 2002/00954).