Modeling US inflation dynamics: persistence and monetary policy regimes

This paper employs the recently developed structural stability test with multiple regime shifts and grid bootstrapping methods to model US inflation dynamics over the past half century. Our empirical results suggest that the persistence of inflation has witnessed significant declines over the most recent period of low inflation and this helps to embed a low inflation environment. The finding is robust to a variety of measures of the inflation series and offers new insight on understanding the stationarity issue of the US inflation series. The authors gratefully acknowledge the two anonymous referees for helpful comments and suggestions, which have led to substantial improvements in the paper. They also wish to thank participants at the 3rd Symposium on Econometric Theory and Applications, and seminar participants at the University of Manchester and Renmin University of China, for useful comments, with particular thanks to Denise Osborn and Jushan Bai for their constructive suggestions. Chengsi Zhang acknowledges support from the China National Social Science Research Fund, Grant No. 08CJY048.     

Modelling inflation shifts and persistence in Tunisia: perspectives from an evolutionary spectral approach

This article examines the dynamic characteristics of the inflation rate in Tunisia over the last two decades, and particularly following the onset of the Arab Spring in 2010 which causes distortions in this country’s monetary policy. We focus on the two specific dimensions of the Tunisian inflation rate: inflation regimes and persistence. We tackle this issue by adopting an evolutionary spectral approach, initially proposed by Priestley and Tong (1973). Our main findings indicate a stable inflation regime in the last 10 years, with an average inflation rate of around 5.5%. It is also found that the Tunisian inflation experienced a high degree of inertia which reflects its gradual responses to shocks. We also discuss the policy implications of these results, which typically require policy-makers to implement sound institutional reforms to reduce inflation.     

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.     

Inertial inflation, indexation and price stickiness: evidence from Brazil

This paper evaluates the inertial inflation hypothesis for Brazil. The hypothesis posits that indexation created a feedback mechanism such that one-time supply shocks were fully transmitted into permanent changes in inflation. A theoretical model is used to show that this outcome is based on the assumption of perfect price flexibility. However, with price stickiness indexation does not produce inertial inflation. The degree of inertia is then compared for two periods: one without indexation (1945–1963), and one with indexation (1969–1985). Finally, vector-autoregressive representations are estimated for the latter period, allowing for price stickiness. The empirical results do not support the hypothesis.     

Expectation formation in the foreign exchange market: a time-varying heterogeneity approach using survey data

Using Consensus Economics survey data on JPY/USD and GBP/USD exchange rate expectations for the 3- and 12-month horizons over the period November 1989–December 2012, we first show that expectations fail the conventional tests of unbiasedness and do not exhibit a learning process towards rationality. Our approach is consistent with the economically rational expectations theory (Feige and Pearce, 1976), which states that information costs and agents’ aversion to misestimating future exchange rates determine the optimal amounts of information on which they base their expectations. The time variability of the cost/aversion ratios justifies at the aggregate level a representation of expectations as a linear combination of the traditional extrapolative, adaptive and regressive processes augmented by a forward market component, whose parameters are allowed to change over time. This mixed expectation model with unstable heterogeneity is validated by our Kalman filter estimation results for the two currencies and the two horizons considered. Although the relative importance of the ‘fundamentalists’ (‘chartists’) is found to increase (decrease) with the time-horizon, chartist behaviour appears to dominate fundamentalist behaviour for both horizons. Central bank intervention is then effective in stabilizing the foreign exchange markets if it encourages fundamentalist activity.     

中国的通货膨胀惯性与通货膨胀不确定性——基于有限理性NKPC模型的分析

本文拓展有限理性菲利普斯曲线模型并结合中国参数进行校准,然后利用校准模型研究中国通货膨胀惯性特征及其与通货膨胀不确定性之间的关系。结果显示,有限理性菲利普斯曲线模型能很好地模拟出与中国实际通货膨胀惯性类似的特征。进一步研究还发现,研究样本期间,中国通货膨胀惯性总体上呈现先上升而逐渐下降的驼峰型特征,而且与通货膨胀预期不确定性存在正向相关关系。这些发现意味着,我国中央银行货币政策滞后效应正在缩短,而为了进一步降低通胀惯性并提高货币政策有效性,引导通货膨胀预期保持稳定是一大途径。     

The evolution of stock market efficiency in the US: a non-Bayesian time-varying model approach

A non-Bayesian time-varying model is developed by introducing the concept of the degree of market efficiency that varies over time. This model may be seen as a reflection of the idea that continuous technological progress alters the trading environment over time. With new methodologies and a new measure of the degree of market efficiency, we examine whether the US stock market evolves over time. In particular, a time-varying autoregressive (TV-AR) model is employed. Our main findings are: (i) the US stock market has evolved over time and the degree of market efficiency has cyclical fluctuations with a considerably long periodicity, from 30 to 40 years; and (ii) the US stock market has been efficient with the exception of four times in our sample period: during the long recession of 1873–1879; the recession of 1902–1904; the New Deal era; and the recession of 1957–1958 and soon after it. It is then shown that our results are partly consistent with the view of behavioural finance.     

The UK consumption function and structural instability: improving forecasting performance using a time-varying parameter approach

Previous studies indicate that the poor forecasting performance of constant parameter UK consumption expenditure models is caused by structural instability in the underlying data generating process. Typically, this instability is removed by reparameterization within the constant parameter framework. An alternative modelling strategy is to allow some, or all, of the parameters to vary over time. A UK non-durable consumption expenditure model with time-varying parameters is developed, based on the permanent income hypothesis of Friedman (1957). This model takes into account temporal changes in the average and marginal propensities to consume. The variation in the parameter estimates is given an economic interpretation in terms of the influence of omitted variables, namely UK financial liberalization and expectational changes. The forecasting performance of this model is superior to that of two widely used constant parameter models. Further tests show that, even if these constant parameter models are respecified as time varying parameter models, the authors' model still retains a superior forecasting performance.     

我国自然失业率的测量与解析——基于1978-2007年数据

通过分析自然失业率的三种数理模型,采用比较静态分析与计量统计检验的方法,发现纳入工资刚性的凯恩斯主义NAIRU模型更符合我国实际.利用这个模型,在放宽自然失业率恒定不变和阶段性变化假设的基础上,测量了1978-2007年我国各年的自然失业率.1978年以来,我国自然失业率总体呈现上升趋势,到2003年为一个极大点;2003-2007年自然失业率开始下降,分别为9.25%、9.09%、13.1%、10.9%、7.15%.另外,我国平均的名义工资刚性度和实际工资刚性度分别为0.873、0.221.在我国,技术进步对自然失业率是具有长期效应而不是短期效应.技术进步倾向于减少自然失业率,而这与Pissarides等人在美国的研究结论是相反的.     

Decomposing household,professional and market forecasts on inflation: a dynamic factor model analysis

A dynamic factor model with stochastic volatility is used to investigate the relationships between three alternative measures of inflation expectations. The results show evidence of both a common time-varying trend and a common transitory component between inflation and short-term inflation expectations from households, professionals and markets. While the common time-varying trend has declined in both level and volatility since the early 1980s, it was found that consumer expectations are disproportionately influenced by the visibility of prices of select few goods. Roughly speaking, a 1% point increase in food and energy prices leads to about 1/3% point increase in consumer forecasts of inflation. In terms of policymaking, this finding suggests that stability in highly visible prices can moderate inflation in a meaningful way.     

The macroeconomy of Angola: breaks and persistence in Angolan macro data

Using long-range dependence techniques we examine the order of integration of Angola’s macro variables from a fractional viewpoint. Based on a small open economy model, the series examined are money reserves, credit, money supply, lending rate, exchange rates, CPI, GDP, oil revenues and government expenditure, for the period of January 2000 to December 2013. The results suggest that the variables are nonstationary with orders of integration equal to or higher than 1 suggesting nonmean-reverting behaviour. Structural breaks reveal that the series reflect the IMF intervention in Angola in 2003 to control inflation. Policy implications are derived.     

An assessment of inflation targeting in a quantitative monetary business cycle framework: evidence from four early adopters

This article examines the effectiveness of inflation targeting (IT) to stabilize the real economy in advanced countries where IT was adopted in the early 1990s. To quantitatively assess IT, this article employs the monetary business cycle accounting methodology recently developed by ?ustek (2011), which is an extended version of Chari, Kehoe, and McGrattan (2007), to monetary models. Our main finding is that the monetary policy wedge that captures economic fluctuations caused by monetary policy has significantly declined since the implementation of IT in the early 1990s. The results suggest that advanced economies, such as Australia, Canada, Sweden and the United Kingdom, that adopted IT in the early 1990s have been successful in stabilizing business cycle fluctuations.     

Formal targets, central bank independence and inflation dynamics in the UK: A Markov-Switching approach

We examine inflation and uncertainty in the UK with a version of the Markov Switching model, which allows for changes in the variance as well as in the mean and persistence of a series. We find that the UK’s attempts at exchange rate pegs in the form of shadowing the deutschmark and entering the ERM were ineffective, and in the latter case counterproductive in lowering inflation uncertainty. The 1981 budget, however, greatly lowered uncertainty, and the adoption of a formal inflation target also had a palpable, negative impact on inflation uncertainty. As a suggestive exercise, we examine inflation uncertainty in the US, and find that, over 2005–2008, in the absence of an inflation target, uncertainty rose in the US, while uncertainty remained low in the UK over this period of rising commodity prices and financial turmoil.     

中国生产性服务业的水平、结构及影响——基于投入—产出法的国际比较研究

本文采用投入—产出法并基于截面数据,对中国和13个OECD经济体的生产性服务业发展水平、部门结构及其影响进行了比较研究。结果发现:与OECD经济体相比,中国国民经济及其三次产业中的物质性投入消耗相对较大,而服务性投入(即生产性服务)消耗相对较小;大多数OECD经济体生产性服务的将近70%都投入到了服务业自身,而中国生产性服务的一半以上则投入到了第二产业;中国与OECD经济体的服务业及其分部门的影响力系数都较小,但后者的感应力系数高于中国,表明中国服务业的增长不仅不能对国民经济产生应有的带动作用,其本身受其他部门的需求拉动作用也不大。中国生产性服务业发展的差距不只是由经济发展阶段决定的,而是在很大程度上缘于社会诚信、体制机制和政策规制的约束。因此,打破市场垄断、理顺市场机制、规范市场运行秩序和政府行为以及打造诚信经济,应该成为政策制订的着力点。     

Estimating potential output and the output gap for the euro area: a model-based production function approach

This paper provides an analysis of multivariate unobserved components models for the estimation of potential output and the output gap in the euro area. Bivariate models of output and inflation and multivariate model-based implementations of the production function approach are considered; according to the latter potential output is derived from the permanent components of the factors of production consistent with stable inflation, whereas the output gap results from the combination of the transitory components. This approach allows to measure the contribution of the various factors of production to potential output growth, and to assess the reliability of the output gap estimates. Various alternative statistical specifications for the separation of trend and cycle are considered entertaining different economic hypotheses. The paper also provides an assessment of the reliability of the alternative output gap estimates and analyses their predictive validity by means of a rolling forecast exercise that provides an evaluation of the capability to forecast future inflation. A preliminary version of this paper appeared as EUI working paper ECO2002/09 and was presented at the European Central Bank, the European University Institute, the Growth and Business Cycles in Theory and Practice conference, Manchester UK, 20–21 June 2002, the Common Features in Rio conference, Rio de Janeiro, 29–31 July 2002. We thank the participants, Michael Artis, Gerard Korteweg, Geoff Kenny, Neale Kennedy, Manuel da Mota Freitas Martins, Gerard Ruenstler, and three anonymous Referees for useful discussions and valuable comments. The paper was largely written while the first author was acting as consultant for the ECB. The views expressed in it do not necessarily reflect those of the ECB. All correspondence to Alberto Musso.     

Towards a better estimation of agricultural supply elasticity: the case of soya beans in Brazil

Brazil is a major exporter of several agricultural commodities and has shown strong interest in agricultural trade negotiations. For several commodities, trade liberalization is expected to be followed by farmgate prices increase and to boost domestic production. However, in a country as big as Brazil, possible supply responses to price increase will probably strongly differ from one region to another. This article focuses on soya beans for which Brazil became a top exporter. The panel data technique is used to estimate the soy bean supply response at national and regional level. Soya bean supply is shown to be very price elastic. Moreover, soya bean supply own price elasticity is much higher in the Center-North regions than in the South of the country. Substitution between livestock and soya bean is also very significant in the Center-North region. World agricultural trade models should take account for such regional variability of soya bean supply elasticity. The results also allow us to discuss the issue of soya bean expansion at the Amazon border.     

Empirical research on monetary policy,asset prices and inflation: an analysis based on provincial panel data in China

In this article, we investigate the dynamic correlations among monetary policy, asset prices and inflation and assess the regional effects of monetary policy in China for the period October 2007 to July 2013. We focus on the interdependencies among monetary policy and asset price fluctuations by using the Shanghai Interbank Offered Rate as the preferred variable for analysing monetary policy movement. In particular, we apply a vector autoregressive model in a panel setting, which allows researchers to examine variations over time or across individual regions. The empirical results presented herein indicate that monetary policy reacts actively to asset prices, although it is still shown to be ineffective. In addition, we find that asset prices display some regional differences in their response to an unexpected monetary policy shock.     

Efficiency of Payments for Environmental Services: Equity and additionality in a case study from a Biosphere Reserve in Chiapas, Mexico

Payments for Environmental Services (PES) have been claimed as a more efficient way of accomplishing conservation and development goals than other indirect strategies, reaching their optimum when the buyer pays the opportunity costs of the foregone benefits. Different inefficient situations have been described, like lack of additionality, where payments are given for practices that would have been adopted anyway. Trade-offs between efficiency and equity of PES have usually emerged as well. In this paper we assess the equity, additionality and stakeholders' perceptions of a PES scheme in a Mexican community inside a Biosphere Reserve. We applied structured interviews to all adults, a total of 66 people from 31 households. Our results show a dual response in equity and additionality, depending on land tenure. PES have an egalitarian effect within landowners and landless groups, but it broadens the gap between them. Additionality is low for landowners and high for the landless people in the community, even though the former are the ones with full decision over the land. Although the scheme does not seem efficient under the classical PES paradigm, it is perceived as a reward, reinforcing conservation attitudes even though most of the interviewees claim it to be insufficient.