On the impact of inflation on output growth: Does the level of inflation matter?

This paper investigates the growth effects of inflation on a wide sample of countries, including both industrialized and emerging economies. Relying upon the estimation of smooth transition and dynamic GMM models for panel data, our findings offer strong evidence that inflation non-linearly impacts economic growth. More specifically, there exists a threshold beyond which inflation exerts a negative effect on growth, and below which it is growth enhancing for advanced countries.     

Does the dutch model really exist?

The policy that led from the "Dutch disease" (in the 1980s) to the "Dutch miracle" (in the 1990s) consists of three tracks: wage moderation, retrenching public expenditure and reducing the tax burden, and slimming the welfare system. The wage moderation track seems to have been the most important. The term "Dutch model" refers to the socioeconomic system of the Netherlands. Most observers point particularly to the relatively low unemployment rate to indicate the success of this model. However, the economic inactivity rate in the Netherlands is not lower than in neighboring countries. This suggests that open unemployment in the Netherlands has been partly replaced with hidden unemployment. In particular, the disability scheme seems to contain a large component of hidden unemployment. Another feature of the Dutch model is its consensus-seeking nature, which is fostered by its institutional structure.     

Does the paradox of plenty exist? Experimental evidence on the curse of resource abundance

There is conflicting evidence about whether abundant resources are indeed a blessing or a curse. We make use of specially designed economic experiments to investigate how resource abundance affects cooperation in the absence or presence of regulatory institutions. We observe that in the absence of regulatory institutions, there is less cooperation in groups with access to large resource pools than in groups with access to small resource pools. However, if regulatory institutions are present, we show that there is more cooperation in groups with access to large resource pools than in groups with access to small resource pools. Our findings also reveal that resource users are more willing to regulate access to abundant than to small resource pools. These findings provide causal evidence for the “paradox of plenty” and identify the causes for the pitfalls and potentials of resource wealth.     

Does the inequality-credit-crisis nexus exist? An empirical re-examination

ABSTRACT

Rajan claims that rising inequality led to financial crises through credit booms in the U.S. Kumhof and Ranciere provide a theoretical formulation for this hypothesis. However, their assertions are not supported by cross-country evidence found in the work of Bordo and Meissner. A few subsequent empirical studies, albeit inspired by this pioneering work, find new evidence not in line with its conclusion but with the Rajan hypothesis. To clarify this controversial issue, we base our study on the B-M framework, resort to different estimators, and employ more model specifications by incorporating the role of deindustrialization. We find strong evidence for the inequality-credit-crisis nexus as modelled by Kumhof et al.     

Does the expectation or realization of a federal election precipitate Canadian output growth?

Abstract This paper asks whether Canadian data is consistent with the predicted effects of political opportunism, partisanship, and political competition on real output growth since Confederation. Using annual data from 1870 to 2005 we find new support for an opportunistic electoral cycle in Canadian data but only if the actual election date used in most studies is replaced by an estimate of the incumbent governing party's subjectively held likelihood of an election arising. In our case the estimate is generated from a Cox‐proportional hazard model. The paper explores in detail the issues raised by using a generated regressor to approximate a subjectively held expectation versus an observable proxy and argues that these conditions are met in our case. Finally we also find evidence consistent with partisan cycles in the data but much less evidence consistent with the hypothesis that changes in the degree of political competition have affected real output growth.     

Does a 'shadow workforce' of inactive nurses exist?

The entire population of inactive nurses in Vermont was surveyed to determine if a "shadow workforce" exists. The notion that large numbers of nurses are available to return to work is not supported by this study. Desirable benefits for those wishing to return are discussed.     

Does trend inflation make a difference?

Although the average inflation rate of developed countries in the postwar period has been greater than zero, much of the extensive literature on monetary policy has employed models that assume zero steady-state inflation. In comparing four estimated medium–scale NK DSGE models with real and nominal frictions, we seek to shed light on the quantitative implications of omitting trend inflation, that is, positive steady–state inflation. We compare certain population characteristics and the IRFs for the four models by applying two loss functions based on a point distance criterion and on a distribution distance criterion, respectively. Finally, we compare the RMSE forecasts and we consider also an indirect inference test. We repeat the analysis for three sub-periods: the Great Inflation, the Great Moderation and the union of the two periods. We do not find strong evidence that a model with trend inflation should always be preferred. During periods of high inflation or when a backward-looking component, indexed to past inflation, is not incorporated in the model, using a model that employs trend inflation can improve the analysis. Nevertheless, where there is uncertainty concerning the change of an inflation regime, such as the recent drop, we suggest adopting a traditional approach that does not use trend inflation.     

Money,reserves, and the transmission of monetary policy: Does the money multiplier exist?

With the use of non-traditional policy tools, the level of reserve balances has risen in the US from roughly $20 billion before the financial crisis to well past $1 trillion. The effect of reserve balances in macroeconomic models often comes through the money multiplier, affecting the money supply and the bank lending. In this paper, we document that the mechanism does not work through the standard multiplier model or the bank lending channel. If the level of reserve balances is expected to have an impact on the economy, it seems unlikely that a standard multiplier story will explain the effect.     

Does productivity growth lower inflation in Korea?

We investigate Granger causality between productivity growth and inflation in Korea using quarterly data for the period 1985Q1–2002Q4. Our results indicate unidirectional Granger causality from productivity growth to inflation. In light of such causality, we estimate the effect of productivity and other variables on productivity. According to our regression results, a 1% increase in labour and Total Factor Productivity (TFP) reduces Consumer Price Index (CPI) inflation by 0.07–0.08% and 0.37–0.44%, respectively. Our results also suggest that the productivity-inflation nexus became stronger in Korea since the Asian financial crisis, and that this was largely due to structural reform and technological progress.     

Averting behavior: Does it exist?

This paper reports the first micro level information on households' reported adjustments in behavior - averting actions - to reduce the risk of exposure to pollutants. The findings are based on a survey of households in suburban Boston and their actions to avoid hazardous wastes. Probit analyses of the factors influencing decisions to undertake these actions indicate that attitude toward hazardous waste risks, confidence in local officials responsible for the problem and information are important determinants of their decisions.     

Does extracting inflation from stock returns solve the purchasing power parity puzzle?

In a recent study by Chowdhry et al. (American Economic Review 95: 255–276, 2005), they suggest that the empirical failure of relative purchasing power parity (PPP) may be because the official inflation data are too sticky. Thus, after extracting the unobservable pure price inflation from equity markets, they find strong evidence supporting relative PPP in the short run. As a replication study, this paper first replicates their original findings successfully. We further investigate whether long-run relative PPP holds using the pure price inflation data constructed by Chowdhry et al. (2005). After constructing pure real exchange rate series using their pure price inflation data, we implement both unit root and cointegration tests on the pure real exchange rates. According to the test results, the evidence suggests that relative PPP does not hold in the long run. Thus, it may be too early to suggest a resolution of the PPP puzzle.     

Does money have a role in the inflation process? Evidence from Australia

Inflation, defined as a sustained increase in the price level, is considered a monetary phenomenon, as it can be explained within the framework of money‐demand and money‐supply relationships. In the extant literature, money growth is shown to remain causally related to inflation across countries and over time, irrespective of the exchange rate regime and stability of the money‐demand function. Nevertheless, emerging literature suggests a diminishing role of money in the conduct of monetary policy for price stability, especially under inflation targeting. Monetary policy in Australia under inflation targeting since 1993 is an example of policy that denies a relationship between money growth and inflation. The proposition that money does not matter insofar as inflation is concerned seems odd in both theory and the best‐practice monetary policy for price stability. This paper uses annual data for the period 1970–2017 and quarterly data for the period 1970Q1–2015Q1. It deploys both the Johansen cointegration approach and the autoregressive distributed lag (ARDL) cointegration approach to investigate for Australia whether money, real output, prices and the exchange rate (non‐stationary variables) maintain the long‐run price‐level relationship that the classical monetary theory suggests in the presence of such stationary variables as the domestic and foreign interest rates. As expected, the empirical findings for Australia are consistent with the classical long‐run price‐level relationship between money, real output, prices and the exchange rate. The error‐correction model of inflation confirms the presence of a cointegral relationship among these variables; it also provides strong evidence of a short‐run causal relationship between money supply growth and inflation. On the basis of a priori theoretical predictions and empirical findings, the paper draws the conclusion that the monetary aggregate and its growth rate matter insofar as inflation is concerned, irrespective of the strategy of monetary policy for price stability.     

Do disaggregated CPI data improve the accuracy of inflation forecasts?

In this paper, we evaluate the role of using consumer price index (CPI) disaggregated data to improve the accuracy of inflation forecasts. Our forecasting approach is based on extracting the factors from the subcomponents of the CPI at the highest degree of disaggregation. The data set contains 54 macroeconomic series and 243 CPI subcomponents from 1992 to 2009 for Mexico. We find that the factor models that include disaggregated data outperform the benchmark autoregressive model and the factor models containing alternative groups of macroeconomic variables. We provide evidence that using disaggregated price data improves forecasting performance. The forecasts of the factor models that extract the information from the CPI disaggregated data are as accurate as the forecasts from the survey of experts.     

Do currency undervaluations affect the impact of inflation on growth?

In this paper, we investigate how the level of currency undervaluations affects the effect of inflation on growth in a sample of 62 countries over the 1980–2015 period. While previous studies find a positive effect of an undervalued currency, we show that higher currency undervaluations reinforce the contractionary effect of inflation on growth. As an undervalued currency is associated with supplementary inflation pressures arising from a cost-push inflation phenomenon and economy overheating, growth is thus penalized. This result is shown to be robust to the exclusion of currency crises episodes from our sample, and dependent of the development level of countries. Specifically, it holds in the case of emerging countries, but not for developing economies. Consequently, policies based on undervaluations should not be encouraged for emerging economies as they tend to reinforce the contractionary effect of inflation on growth.     

Did the EMS encourage inflation convergence?

This paper studies the convergence of inflation rates over the period of 1983–93 for some countries within the European Monetary System. Three different price indices are considered for consumer goods, services, and industrial products. This study focuses on the difference between core and peripheral countries for measuring convergence speed. By using - and -convergence tools, as previously identified in studies on output growth convergence, it was found that the convergence process did not evolve equally whether considered through price indices, time, or countries.     

Has the 2008 financial crisis and its aftermath changed the impact of inflation on inflation uncertainty in member states of the european monetary union?

We study to what extent the financial crisis of 2008 and its aftermath have changed the impact of inflation on inflation uncertainty in the 12 original member states of the European Monetary Union (EMU). We adopt a time‐varying coefficient regression model with stochastic volatility effects, and extract two measures of inflation uncertainty from our data, namely, (1) The conditional volatility of inflation, (2) The conditional volatility of steady‐state inflation. (1)–(2) represent short‐run and steady‐state inflation uncertainty, respectively. The time‐varying impact of inflation on inflation uncertainty is analyzed using Markov‐switching regressions, where switching between the low and high inflation uncertainty regime is determined via an unobserved Markov process. Results suggest that the 2008 financial crisis and its aftermath have changed the impact of inflation on (1) and (2) across the selected EMU member states. However, a uniform pattern cannot be detected. For some member states, we document a strong link, whereas for others, the impact of inflation on inflation uncertainty is relatively weaker.     

Does inflation targeting make a difference in developing countries?

We evaluate the treatment effect of inflation targeting in thirteen developing countries that have adopted this policy by the end of 2004. Using a variety of propensity score matching methods, we show that, on average, inflation targeting has large and significant effects on lowering both inflation and inflation variability in these thirteen countries. However, the effectiveness of inflation targeting on lowering inflation is found to be quite heterogeneous. The performance of a given inflation targeting regime can be affected by country characteristics such as government's fiscal position, central bank's desire to limit the movements of exchange rate, its willingness to meet the preconditions of policy adoption, and the time length since the policy adoption.     

Does a factor Phillips curve help? An evaluation of the predictive power for U.S. inflation

This article evaluates various models’ predictive power for U.S. inflation rate using a simulated out-of-sample forecasting framework. The starting point is the traditional unemployment Phillips curve. We show that a factor Phillips curve model is superior to the traditional Phillips curve, and its performance is comparable to other factor models. We find that a factor AR model is superior to the factor Phillips curve model, and is the best bivariate or factor model at longer horizons. Finally, we investigate a New Keynesian Phillips curve model, and find that its forecasting performance dominates all other models at the longer horizons.     

Does export and productivity growth linkage exist? Evidence from the Indian manufacturing industry

This paper examines the interrelation between exporting and productivity performance by using a representative sample of Indian manufacturing firms over the period 1994–2006. Specifically, we attempt to test the empirical validity of the learning‐by‐exporting and the self‐selection hypotheses for our sample firms. In order to investigate the linkage, in the first step, we test for causality between TFP and export intensity of firms. Although overall results are rather mixed and provide some support for both hypotheses, still the empirical results are more favorable for the self‐selection behavior of firms. In the next stage, we attempt to provide evidence on export and productivity linkage that occurs during various phases of transition in the export market. Our results suggest that entering in the export market does not improve productivity performance. However, the decision to exit from the export market does have an adverse effect on the productivity. In addition, our results indicate the presence of a high sunk cost of exporting coupled with perhaps lesser information about foreign markets. Finally, our results also lend some support to the significant role of in‐house research activities and economies of scale in firms' productivity performance.     

The U.S. inflation process: Does nominal wage inflation cause price inflation,vice-versa,or neither?

Low unemployment has revived concerns about accelerated inflation. This paper examines the relationship between price and nominal wage inflation. It finds that it varies by business cycle. Prior to the great oil shock of 1973, price and nominal wage inflation were unconnected in a Granger-causal sense. In the 1970s, wage inflation caused price inflation. In the 1980s, the relationship reversed and price inflation caused nominal wage inflation. In the 1990s, the pattern has changed again, and there is some weak evidence of bidirectional causality between wages and PPI inflation. However, wages continue to have no impact on CPI inflation, which is widely viewed as one of the Fed's target variables. This suggests that wage inflation should be de-emphasized as a monetary policy information variable.