Threshold cointegration between inflation and US capacity utilization

An analogue to the Phillips curve shows a positive relationship between inflation and capacity utilization. Some recent empirical work has shown that this relationship has broken down when using data after the mid-1980s. We empirically investigate this issue using several threshold error correction models. We find, in the long run, a 1% increase in the rate of inflation leads to approximately a 0.0046% increase in capacity utilization. The asymmetric error correction structure shows that changes in capacity utilization show significant corrective measures only during booms while changes in inflation correct during both phases of the business cycle with the corrections being stronger during recessions. We also find that, in the short run, changes in the inflation rate do Granger cause capacity utilization while changes in capacity utilization do not Granger cause inflation. The Granger causality from inflation to capacity utilization can be interpreted as supporting recent calls made in the popular press by some economists that it may be desirable for the Federal Reserve Bank to try to induce some inflation. However, it is also possible to interpret these Granger causality results as arising because both variables respond to some more fundamental set of variables with the inflation rate simply responding sooner. The lack of Granger causality from capacity utilization to inflation casts doubt on the older view that capacity utilization could be a leading indicator for future inflation.     

Real and nominal UK interest rates,ERM membership,and inflation targeting

This article estimates a two-factor term structure model to analyze the time-varying mean-reverting levels of the UK real and nominal short-term interest rates. Before and during British membership in the ERM, the mean-reverting levels of real and nominal short rates have a strong negative correlation. Afterward, when the UK implemented an inflation targeting policy, the mean-reverting levels have a strong positive correlation. The article also reports empirical evidence of a link between the time-varying central tendencies and inflation in the disinflation period before the implementation of the inflation targeting policy.     

Productivity growth and inflation in Europe: Evidence from panel cointegration tests

In this paper we investigate the productivity growth – inflation nexus in fifteen European countries over the period 1961–1999 using panel unit root and panel cointegration tests. Emphasis is placed on the distinction between long-run and short-run causality using recently developed tests appropriate for heterogeneous panel. The empirical results are relevant for the role of the EMU and the Treaty of Maastricht in catching up, real convergence, and the future growth prospects of Europe. The policy implications of the findings are discussed in detail.     

The relationship between interest rates and inflation during the prewar period: Some empirical evidence

This study examines the relationship between interest rates and inflation during the prewar period. The results of all empirical analyses are clearly at variance with the Fisher hypothesis while supporting the ‘inverted Fisher hypothesis’ proposed by Carmichael and Stebbing (1983). This result gives rise to some serious doubts on the overall performance of the former hypothesis.     

Near unit root and the relationship between inflation and interest rates: A reexamination of the Fisher effect

Tests of the Fisher effect are plagued by high persistence in interest rates. Instead of standard regression analysis and asymptotic results, methods relying on local-to-unity asymptotics are employed in testing for the Fisher effect with monthly U.S. data covering the period 1953:1–1990:12. These procedures are extensions of a recently presented method (Cavanagh, Elliott and Stock (1995)) based on simultaneous confidence intervals, and they have the advantage of being asymptotically valid whether interest rates are integrated of order one or zero, or near unit root processes. Taking appropriately account of the near unit root problem the findings in most of the previous literature are reconfirmed. There is support for the Fisher effect in the interest rate targeting period (1953:1–1979:10) of the Federal Reserve but not in the 1979:11–1990:12 period. First version received: July 1999/Final version received: April 2000     

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     

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.     

Threshold cointegration and nonlinear adjustment between goods and services inflation in the United States

In this paper, we model the long-run relationship between goods and services inflation for the United States over the period 1968:1–2003:3. Our empirical methodology makes use of recent developments on threshold cointegration that consider the possibility of a nonlinear relationship between the two inflation series. According to our results, the null hypothesis of linear cointegration would be rejected in favor of a two-regime threshold cointegration model. Consequently, we could expect a cointegrating relationship only when the divergence between services inflation and goods inflation is above the threshold point estimate.     

Estimating the long-run relationship between income inequality and economic development

There are several theories describing the effect of income inequality on economic growth. These theories usually predict that there exists some optimal, steady-state growth path between inequality and development. This study uses a new measure of income distribution and panel data cointegration methods to test for the existence of such a steady-state equilibrium relation. It is shown that there is a long-run equilibrium relationship between the variables, and that this relationship is negative in developed economies.     

Instability tests in cointegration relationships. An application to the term structure of interest rates

This paper tries to review, from a practitioner's point of view, the recent strand of literature on cointegration tests allowing for structural changes or parameter instability. Thus, we apply several tests using as an example the expectations model of the term structure of interest rates. The results are consistent with the existence of cointegration between the long and the short run Spanish interest rates, with a vector (1,−1), as predicted by the theory. However, there is also evidence of structural instability, mainly at the beginning of 1994, that can be attributed to the financial changes that occurred in Spain as a result of its external commitments in the process of the European Monetary Union.     

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.     

The long-run relationship between stock return dispersion and output

Based on the rational that some industry groups are more closely linked to the business cycle than others, we re-examined a previous analysis on the long-term relationship between stock return dispersion by industry and Gross Domestic Product (GDP), which evaluated data until 1987 by extending it to 2008. Using Mean Square Forecast Errors (MSFE) statistics, we find that incorporating the return dispersion in Vector Autoregressive (VAR) models enhances their forecasting power for output (GDP) in the long run. This article also determines that the relationship between stock return dispersion by industry and GDP is tenuous in the recent decade from 1999.     

On the nonlinear relationship between inflation and economic growth

Using a large panel data set from both developed and developing economies and employing the PSTR and dynamic GMM techniques, this study highlights two aspects of the inflation–growth relationship. First, it analyzes the nonlinearity of the relationship and identifies several thresholds for the global sample and for various income-specific sub-samples. Second, it identifies some country-based macroeconomic features that influence this nonlinearity. Our empirical results substantiate both views and validate the fact that inflation–growth nonlinearity is sensitive to a country׳s level of financial development, capital accumulation, trade openness and government expenditures. Moreover, these country-specific characteristics result in some marked differences in this nonlinear relationship.     

The short- and long-run relationship between the illicit drug business and terrorism

We study the effect of the illicit drug business on terrorism for a sample of 58 countries for the 1984–2007 period. Consistent with the notion of a crime-terror nexus, we find that in the long run, higher drug prices are associated with more terrorism. In the short run, however, increases in drug prices lead to less terrorism, potentially because terrorist groups respond to higher drug business attractiveness by prioritizing criminal over terrorist activity.     

Expected inflation and the optimal number of nominal wage rate revisions

A neglected aspect of wage contracts, namely the number of times that the nominal wage rate will be revised during the course of a non-indexed contract, is considered. Theory and evidence suggest that the optimal number of revisions depends on the cost of each revision, expected inflation and contract length.     

Money and inflation in Germany: A cointegration analysis

This paper analyses the relation between money and inflation in Germany in a cost-push/demand-pull model of an open small economy by means of cointegration methods. The full-information-maximum-likelihood method of Johansen as well as structural methods are applied to datasubsets and the full data set. The focus of the paper is on tests for overidentifying restrictions and for weak and strong exogeneity within these data sets. The result of the paper is that the money stock, the price level and gross national product are endogenous whereas the interest rate and the real import price are both weakly and strongly exogenous. By means of the price cointegration relation we illustrate how monetary targeting should react to imported inflation.     

Inflation regimes,core inflation measures and the relationship between producer and consumer price inflation

The main purposes are to develop a method for measuring the economies of scope, which involves the use of non-parametric production frontiers and does not require information on input prices; and to apply this method to individual hospital data drawn from a sample of Spanish hospitals. The results confirm the presence of technical inefficiencies and also of potential and non-exploited economies of scope. The combination that produces most economies of scope is that of gynaecology and paediatrics.     

ARDL bounds tests and robust inference for the long run relationship between real stock returns and inflation in Australia

This paper conducts an empirical investigation into the long run relationship between real stock returns and inflation in Australia by employing the ARDL bounds tests. There exists a stock return–inflation long run relationship, and the long run parameters are non-linear functions of those of the conditional error correction model. The OLS estimates of the latter model constitute the long run parameter estimates and their standard errors are estimated by delta methods. The long run model estimates so constructed can be biassed and inconsistent, and the delta method is derived assuming asymptotic normality, which does not hold in this investigation. In this paper, to overcome these limitations of the traditional methods, we employ the bias-corrected bootstrap method. As a consequence, the robust and reliable statistical inference can be made on the long run return–inflation relationship. The empirical results show that the expected inflation had no significant effect on real stock returns, while the observed inflation had a significant and negative effect. Furthermore, the data generating process of the returns–inflation relationship was not affected by the change in monetary policy regime in the early 1990s. These findings imply that Australian stocks have been very effective instruments for hedging against expected inflation. Because of the resilience of Australian economy to the current global financial and economic crisis, this finding has implications for long term domestic and foreign investors in Australia.     

An empirical examination of long-run purchasing power parity using cointegration techniques

This paper presents an empirical analysis of long-run purchasing power parity (PPP) for five major exchange rates using recently developed econometric techniques on the cointegration of economic time series. Our empirical results are extremely unfavourable to the PPP hypothesis as a long-run equilibrium condition, even with an allowance made for measurement error and/or tranportation costs. In particular, we are unable to reject the hypothesis of non-cointegration of the exchange rate and relative prices for any of the countries concerned. Far from finding a stable, long-run proportionality between exchange rates and relative prices, our results therefore suggest that they tend to drift apart without bound.