INFLATION DYNAMICS IN LATIN AMERICA

This article studies the mean and the persistence of inflation in the 10 largest Latin American countries for the period 1980–2007. We find multiple shifts in the mean, with inflation in the region increasing throughout the eighties and decreasing in the nineties, thus documenting that the rise and fall of inflation in Latin America occurred a decade later than in industrial countries. Regarding the persistence, we find that it is high but that it decreases when the shifts in the mean are taken into account, as in developed countries, while it appears to have decreased recently in more than half of the countries in our sample. Finally, we find that only about a third of the total variation of inflation in Latin America can be explained by a common factor and, therefore, that most of the variation in the region has been related to idiosyncratic factors. We discuss the relation of our findings with economic policies implemented in the region . ( JEL E31, E42, C22)     

Inflation Targeting and Inflation Persistence

This paper argues that the adoption of an inflation target reduces the persistence of inflation.We develop the theoretical literature on inflation persistence by introducing a Taylor Rule for monetary policy into a model of persistence and showing that inflation targets reduce inflation persistence.We investigate changes in the time series properties of inflation in seven countries that introduced inflation targets in the late 1980s or early 1990s.We find that the persistence of inflation is greatly reduced or eliminated following the introduction of inflation targets.     

Inflation persistence: The path of labor market structural reforms

In this paper, using a monetary policy framework where the central banker is considered as conservative, we investigate the role of labor market structural reforms in inflation dynamics. Our theoretical model suggests that a more deregulated labor market reduces inflation persistence. Using data from a large sample of OECD countries over the period 2000–2012, we empirically confirm our theoretical proposition. The main policy implication is that the reduction of inflation persistence can be addressed not only by central banks, but also by governments through the path of labor market structural reforms.     

Inflation persistence in the Euro area before and after the European Monetary Union

This paper provides new evidence on inflation persistence before and after the European Monetary Union (EMU). Taking into account fractional integration of inflation, we confirm that inflation dynamics differed considerably across Euro area countries before the start of EMU. Since 1999, however, results obtained from panel estimation indicate that the degree of long run inflation persistence has converged. In line with theoretical predictions, we find that the persistence of inflation has significantly decreased in the Euro area, probably as a result of the more effective monetary policy of the ECB.     

Inflation persistence in central and eastern European countries

This article studies inflation persistence with time-varying coefficient autoregressions for 12 central European countries in comparison with the United States and the euro area. We find that inflation persistence tends to be higher in times of high inflation. Since the oil price shocks, inflation persistence has declined both in the United States and the euro area. In most central and eastern European countries, for which our study covers 1993–2012, inflation persistence has also declined, with the main exceptions of the Czech Republic, Slovakia and Slovenia, where persistence seems to be rather stable. Our findings have implications for the conduct of monetary policy and for a possible membership in the euro area. Among the two time-varying coefficient methods we use, our results favour the flexible least squares smoother over the Kalman smoother. We also conclude that the OLS estimate of an autoregression is likely upward biased relative to the time-average of time-varying parameters, when the parameters change.     

Progressive taxation and human capital as determinants of inflation persistence

In this study, we introduce progressive taxation and human capital differences across productive sectors into a typical monetary policy game. The objective of this work is to reveal the potential short-run effects of these two typical features of economic growth on inflation dynamics. In our framework, such features act as frictions of labor mobility across sectors. We show that an increased progressivity of taxation lowers the diffusion of shocks, and in turn increases inflation persistence. Moreover, the dispersion of human capital across sectors acts as a barrier to labor mobility and thereby increasing inflation inertia through the same channel. We also empirically verify these findings by employing panel data analysis in a sample of 28 OECD countries.     

Sticky information and inflation persistence: evidence from the U.S. data

This paper analyzes the relationship between sticky information and inflation persistence by implementing a novel approach to estimate the Sticky Information Phillips Curve (SIPC). The degree of sticky information is estimated using a GMM estimator that matches the covariance between inflation and the shocks that affect firms’ pricing decisions. Although the SIPC contains an infinite number of terms, the theoretical covariances derived from the model have finite dimensions, thus allowing the estimation of the structural parameters without any truncation of the original model. This work shows that sticky information is significantly different if the model is estimated by matching inflation persistence or inflation variance. Previous empirical literature found that the SIPC model does not provide an accurate representation of the US postwar inflation. This paper qualifies such a finding by demonstrating that the SIPC is able to match the inflation persistence only at the cost of mismatching the inflation variance.     

Reexamining the relationship between inflation and growth: Do institutions matter in developing countries?

Using a large panel of countries during the period 1950–2009, we estimate the inflation thresholds above which its association with economic growth is expected to be negative, taking into account differences in institutions across countries. First, in line with previous literature, we find that the estimated threshold is substantially higher for developing countries compared to that of developed countries. However, we further show that the inflation threshold in developing economies falls when we consider reduced groups that exceed certain levels of institutional quality. We also find that the cost of inflation increases with the quality of institutions.     

货币政策对物价稳定和经济增长的效应——中国与巴基斯坦的比较研究

本文采用自回归分布滞后模型对中国和巴基斯坦两国货币政策、通货膨胀与经济增长之间的长期关系进行了比较研究,由此得出如下几点结论:第一,两国的经验数据都印证了经济学家们普遍接受的通货膨胀是一种货币现象的推论;第二,货币非中性假说在两国的经验数据中均无法被拒绝;第三,在中国存在货币数量论所描述的货币供给与通货膨胀同步增长的预测关系,而这种关系在巴基斯坦却不存在;第四,两国若想实现较高的经济增长都必须在长期内降低通货膨胀率。     

International co-movements of real and financial economic variables

This study presents a first attempt at investigating whether the international co-movements of real economic activity conform to the same international co-movements of financial activity. This study tests the international co-movements of real economic activity, on the one hand, and financial variables such as stock returns, interest rates, inflation rates and risk premiums, on the other hand. We employ a dynamic correlation model on data from OECD countries for the period 1980–2010. Our findings demonstrate that international stock markets co-react in accordance with the underlying international economic forces. We also document three other results. First, the correlation among countries with respect to real economic activity is statistically positive, but the level of this correlation is lower than that of financial variables. Second, there is a significant increase over time in the international correlation level with respect to the financial variables. Finally, the creation of the Euro Monetary Union and the adoption of an inflation targeting policy in many countries have increased the international correlation of all of the financial variables tested. The article concludes with two implications from these findings: (1) predictions in the context of international portfolio diversification, and (2) policy making at the fiscal and monetary levels.     

Exchange rate movements and monetary policy in Brazil: Econometric and simulation evidence

The literature on monetary economy has aroused growing interest in macroeconomics. Due to computational advancements, models have become increasingly more complex and accurate, allowing for an in-depth analysis of the relationships between real economic variables and nominal variables. Therefore, using a dynamic stochastic general equilibrium (DSGE) model, based on Gali and Monacelli (2005), we propose and estimate a model for the Brazilian economy by employing Bayesian methods so as to assess whether the Central Bank of Brazil takes exchange rate fluctuations into account in the conduct of monetary policy. The most striking result of the present study is that the Central Bank of Brazil does not directly change the interest rate path due to exchange rate movements. A simulation exercise is also used. Our conclusion is that the economy quickly accommodates shocks induced separately on the exchange rate, on the terms of trade, interest rate, and global inflation.     

Inflation and growth: Explaining a negative effect

The paper presents a monetary model of endogenous growth and specifies an econometric model consistent with it. The economic model suggests a negative inflation-growth effect, and one that is stronger at lower levels of inflation. Empirical evaluation of the model is based on a large panel of OECD and APEC member countries over the years 1961–1997. The hypothesized negative inflation effect is found comprehensively for the OECD countries to be significant and, as in the theory, to increase marginally as the inflation rate falls. For APEC countries, the results from using instrumental variables also show significant evidence of a similar behavior. The nature of the inflation-growth profile and differences in this between the regions are interpreted with the credit production technology of the model in a way not possible with a standard cash-only economy. Research assistance by László Konya, Rezida Zakirova, and Anton Nakov and comments by Michal Kejak, Myles Wallace and Toni Braun are kindly acknowledged, along with comments from the 17^th European Economic Association Meetings, Venice, and the 10^th International Panel Data Conference, Berlin. We also thank the editors and referees for valuable comments, and the first author is grateful to Central European University for research funds.     

Inflation‐Growth Profiles Across Countries: Evidence from Developing and Developed Countries

There is growing evidence from multi‐country studies indicating that there is a turning point in the relationship between inflation and economic growth beyond which the detrimental effects of high inflation offset the stimulating effects of mild inflation on growth. However, it is not clear whether it is appropriate to assume an identical turning point in the inflation and growth relation across countries at various stages of development. Using a non‐linear specification and the data from four groups of countries at various stages of development, this paper examines the possibility for a family rather than a single inverted U relation across countries at various stages of development. The estimated turning points are found to vary widely from as high as 15% per year for the lower‐middle‐income countries to 11% for the low‐income countries, and 5% for the upper‐middle‐income countries. No statistically detectable, long‐run relationship between inflation and growth is evident for the OECD countries. The results indicate the potential bias in the estimation of inflation–growth nexus that may result from combining various countries at different levels of development. The existence of such a degree of heterogeneity across countries at various stages of development also suggests the inappropriateness of setting a single, uniform numerical policy target applicable to all (developing) countries.     

The exploration of economic crises: parameter uncertainty and predictive ability

Over a long horizon, this paper examines joint economic crises and determines the power of 49 variables in predicting such episodes. While incorporating dynamism in the prediction, we generate the predictive power of various specifications and model the uncertainty in the parameters of interest. The results reveal that growth of real gross domestic product per capita, regulation, bank non‐performing loans, interest rate and inflation rate are the most significant variables in predicting the joint economic crises. These variables predict economic crises with about 93% accuracy and can predict joint economic crises in developing countries and recent joint crises.     

Evolving UK and US macroeconomic dynamics through the lens of a model of deterministic structural change

Using a model of deterministic structural change, we revisit several topics in inflation dynamics explored previously using stochastic, time-varying parameter models. We document significant reductions in inflation persistence and predictability. We estimate that changes in the volatility of shocks were decisive in accounting for the great moderations of the United States and the United Kingdom. We also show that the magnitude and the persistence of the response of inflation and output to monetary policy shocks has fallen in these two countries. These findings should be of interest in those seeking to resolve theoretical debates about the sources of apparent nominal and real frictions in the macroeconomy, and the causes of the Great Moderation.     

Time-varying persistence in US inflation

The persistence property of inflation is an important issue not only for economists, but especially for central banks, given that the degree of inflation persistence determines the extent to which central banks can control inflation. Further, not only is it the level of inflation persistence that is important in economic analyses, but also the question of whether the persistence varies over time, for instance, across business cycle phases, is equally pertinent, since assuming constant persistence across states of the economy is sure to lead to misguided policy decisions. Against this backdrop, we extend the literature on long-memory models of inflation persistence for the US economy over the monthly period of 1920:1–2014:5, by developing an autoregressive fractionally integrated moving-average-generalized autoregressive conditional heteroskedastic model with a time-varying memory coefficient which varies across expansions and recessions. In sum, we find that inflation persistence does vary across recessions and expansions, with it being significantly higher in the former than in the latter. As an aside, we also show that persistence of inflation volatility is higher during expansions than in recessions. Understandably, our results have important policy implications.     

On the dynamics of inflation persistence around the world

We study the dynamics of inflation persistence in 45 countries for the period 1960–2008 using a recently developed test for multiple changes in persistence, which decomposes the sample information between adjacent I (0) and I (1) periods. We find that: (i) inflation persistence and average inflation tend to fall and rise at the same time; (ii) in some countries there are changes in the level of inflation which do not seem to be related to changes in inflation persistence; (iii) around half of the countries analyzed do not present any burst of I (1) behavior, and hence have stationary inflation throughout; (iv) for the other half, we detect switches of the type I (0) ? I (1) ? I (0), hence, inflation persistence, when it has occurred, has been temporal; and, (v) for about half of the countries in which inflation has presented I (1) behavior, persistent inflation lasted more than a decade. In addition, we find that in the last 50 years there have been mainly two episodes where long bursts of I (1) inflation took place simultaneously among groups of countries. In general, the “Great Inflation” occurred during the seventies and eighties in advanced economies, whereas it occurred during the eighties and nineties in emerging economies, particularly in Latin America.     

Time variation in inflation persistence: New evidence from modelling US inflation

This article explores how inflation persistence relates to the conduct and goals of monetary policy by presenting a new approach to modelling US inflation persistence and the Fed's dual mandate. Our framework fills a gap in pre-existing models by more flexibly accounting for diverse dynamic properties and shocks. Estimating a Phillips Curve model augmented with inflation volatilities and expectations, we find that the degree of monthly inflation persistence is time variant since World War II. Variations in persistence continue to be observed regardless of the absolute level of inflation and the extent of the trade-off between inflation and unemployment. We demonstrate that inflation persistence varies in line with expectations formed by memories of past inflation. This supports the case for more flexible monetary policy at times, as in the 1980s or especially the present decade, when inflation is more persistent.     

Assessing French inflation persistence with impulse saturation break tests and automatic general-to-specific modelling

This article has three different motivations. Firstly, we wish to contribute to the debate on whether French inflation has been persistent since the mid-eighties. Empirical evidence in this domain has been mixed. We use the standard method of testing for breaks in the mean of the inflation series to conclude whether possible unit root findings are the result of neglected breaks. Then, we build standard autoregressive representations of inflation, using an automatic general-to-specific approach. We conclude against inflation persistence in the sample period, and the point estimates of persistence we obtain are several percentage points below those achieved with other break tests and model selection methods. Moreover, our final model is congruent. Secondly, we provide the first empirical application of the new impulse saturation break test. The resulting estimates of the break dates are in line with other literature findings and have a sound economic meaning, confirming the good performance the test had revealed in theoretical and simulation studies. Finally, we also illustrate the shortcomings of the Bai–Perron test when applied to a small sample with high serial correlation. Indeed, we show the Bai–Perron break dates’ estimates would not allow us to build a congruent autoregressive representation of inflation.     

INFLATION PERSISTENCE AND FLEXIBLE PRICES*

If the central bank follows an interest rate rule, then inflation is likely to be persistent, even when prices are fully flexible. Any shock, whether persistent or not, may lead to inflation persistence. In equilibrium, the dynamics of inflation are determined by the evolution of the spread between the real interest rate and the central bank's target. Inflation persistence can be characterized by a vector autocorrelation function relating inflation and output. This article shows that a flexible‐price, general‐equilibrium business cycle model with money and a central bank using an interest rate target can account for such inflation persistence.