Revisiting the mean reversion of inflation rates for 22 OECD countries

This study applies a flexible Fourier stationary test, proposed by Becker et al. (2006) to investigate the mean reversion of inflation in 22 OECD countries over the period of 1961 to 2011. While traditional unit root tests give us mixed results, empirical results from our flexible Fourier stationary test indicate that mean reversion of inflation holds in all 22 OECD countries. Our results have important policy implications for the 22 OECD countries under study.     

Solving the Misesian migration conundrum

This paper reviews Ludwig Von Mises’ concerns surrounding unrestricted immigration and relates them to the current debate surrounding immigrants’ impact on destination countries’ institutions. It then outlines a policy of generally unrestricted immigration with selective restrictions that addresses Mises’ concerns and concerns about destination country institutions, while still achieving the majority of the economic gains that unrestricted immigration is forecast to achieve.

     

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     

Does inflation uncertainty increase with the level of inflation?

This paper presents evidence that if agents forecast inflation rationally, using an estimate of the reduced form equation which generated the data, then the size of their forecast errors is positively correlated with the level of inflation. Forecast errors are measured first as the residuals from a full sample OLS regression, and secondly from one period ahead, outside sample, forecasts using a regression estimated from only data available at the time of the forecast. Thus, agents who form rational expectations about the variance, as well as the mean, of inflation should form conditional variances dependent on the level of inflation, at the date of the forecast.     

On the real effects of inflation and inflation uncertainty in Mexico

We estimate an augmented multivariate GARCH-M model of inflation and output growth for Mexico at business cycle frequencies. The main findings are: (1) inflation uncertainty has a negative and significant effect on growth; (2) once the effect of inflation uncertainty is accounted for, lagged inflation does not have a direct negative effect on output growth; (3) However as predicted by Friedman and Ball, higher average inflation raises inflation uncertainty, and the overall net effect of average inflation on output growth in Mexico is negative. That is, average inflation is harmful to Mexican growth due to its impact on inflation uncertainty. (4) The Mexican Presidential election cycle significantly raises inflation uncertainty both during the year of the election and the year following the election which has correspondingly negative effects on output growth.     

Revisiting the Okun relationship

Our article revisits the Okun relationship between observed unemployment rates and output gaps. We include in the relationship the effect of labour market institutions as well as age and gender effects. Our empirical analysis is based on 20 OECD countries over the period 1985–2013. We find that the share of temporary workers (which includes a high and rising share of young workers) played a crucial role in explaining changes in the Okun coefficient (the impact of the output gap on the unemployment rate) over time. The Okun coefficient is not only different for young, prime-age and older workers but also it decreases with age. From a policy perspective, it follows that an increase in economic growth will not only have the desired outcome of reducing the overall unemployment rate but it will also have the distributional effect of lowering youth unemployment.     

Revisiting the Olympic Effect

By utilizing the log‐linear gravity model, other authors have found statistically robust, permanent and large effects of hosting mega‐events (e.g. Olympics) on international exports. Surprisingly, they found that the unsuccessful bidders to host the Olympics experienced a similar impact on exports. Utilizing alternate specification such as the Poisson pseudo‐maximum likelihood (PPML) estimation that allows for heteroskedasticity prevalent in trade data, the this paper fails to find a robust positive effect of hosting and bidding for a mega‐event on total aggregate exports. Under heteroskedasticity, the parameters of log‐linearized models estimated by ordinary least squares (OLS) lead to biased estimates of the true elasticities.     

Revisiting the Lemons Market

This article extends the standard competitive adverse selection model by allowing for qualitatively different information structures of agents on the informed side of the market. Using the stylized framework of the market for used cars, we examine the welfare properties of equilibria under the assumption that a fraction of the sellers remains uninformed about a parameter that is relevant for their own transaction. Whether market performance increases or decreases in the number of uninformed sellers is shown to depend on (1) the potential gains from trade in the market and (2) the average quality of the sellers' information structure.     

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.     

Dollarization and the inflation threshold

Abstract.  Empirical evidence suggests non-linearity in the impact of inflation on financial intermediation and real activity. Evidence also suggests that high inflation affects financial intermediation through the substitution of dollars 'under the mattress' for savings in domestic banks. We model an economy where inflation and real activity are positively related at low levels of inflation. However, when the inflation rate exceeds a threshold, agents substitute dollars for deposits issued by domestic banks, reducing the scale of financial intermediation and investment. As a consequence, at high levels of inflation, capital stock and output become negatively related to the inflation rate.     

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.     

Conflict inflation: estimating the contributions to wage inflation in Australia during the 1990s

One of the major emerging macroeconomic problems during thepast century has been the tendency for inflation to accelerateunder prolonged periods of full employment. According to Isaacand Kaldor, this arises because the three major objectives ofwage earners often conflict. The first objective is the desireto maintain relativities; the second is the desire to have a‘fair’ share of companies' profits; and the thirdis a reluctance to allow any encroachment on achieved standardsof living owing to unfavourable (exogenous) events. This papertests how well these three objectives explain wage inflationin Australia using a pseudo-panel data based on the period 1989–2000.The authors find that wages are sensitive to the three majorobjectives, but not to occupational unemployment rates.     

Revisiting Externalities

For economies with one-sided externalities between firms, four types of results are presented and discussed: (i) the impossibility of decentralized finite-dimensional mechanisms guaranteeing Pareto optimality; (ii) the possibilities for Pigou taxes in situations where Arrovian markets cannot function; (iii) that mergers may be able to internalize "weak" externalities but not "strong" ones; and (iv) that "parallelism" of indifference curves (quasi-linear utilities, absence of income effects) is necessary, and not merely sufficient, for the validity of the Coase Invariance Theorem (asserting that alternative institutional arrangements do not change the level of externality). The paper builds on the seminal contributions of Starrett, Calsamiglia, Baumol, Bradford, Oates, Boyd, and Conley.     

Revisiting the infant industry argument

This paper identifies a flaw in the infant industry argument that previous literature has ignored. A simple model first replicates the infant industry logic but subsequently shows that, in the presence of a ‘traditional technology’ with poor growth potential, the infant-industry logic is likely to fail. Under protectionism domestic producers substitute advanced technologies with the low-growth alternative, thereby inhibiting learning and economic growth. Protectionism's adverse effect on development is magnified by complementarities among advanced input goods and, under adequate conditions, in a three-country setting.     

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.     

Canadian inflation targeting

This paper examines the intellectual environment in Canada that led to the adoption of inflation targets starting in 1991, reviews some of the Canadian contributions to the vast literature on inflation targeting and presents evidence in support of the view that the implementation of inflation targeting in Canada has been particularly successful when compared with the experiences of other inflation‐targeting countries and the US.     

On the dynamics of international inflation

We investigate the dynamic properties of inflation in 20 OECD countries with a novel approach based on the autocorrelation function. We find evidence in favor of long memory and nonlinearity. Linear autoregressive models are shown to be misspecified.