How does inflation determine inflation uncertainty? A Chinese perspective

Quality & Quantity - Using a bootstrap Granger full-sample causality test and a sub-sample rolling window estimation, this paper examines the causal link between inflation and inflation...     

Are central banks really breaking the (policy) rules?

• ? Looking at the strength of the global economy, it's no surprise that simple policy rules suggest that interest rates in some advanced economies are much too low and/or that several rate hikes would be needed in 2018 to avoid falling further behind the curve. Nonetheless, we expect central banks to respond cautiously and we see a slower pace of tightening than the consensus view .
• ? Policy rules, such as the Taylor Rule, have long been considered a useful guide to the potential path for policy rates. But while it suggests that current US, Eurozone and Australian central bank rates are broadly appropriate, it signals that UK, Canadian, and Swedish rates should be substantially higher. Based on our economic forecasts, Taylor Rules suggest that the central banks in the US, Eurozone, Canada and Australia will all need to raise intertest rates by around 100bps by end‐2018.
• ? However, there are several reasons not to draw strong conclusions from such point estimates. First, the Taylor Rule requires estimates of two unobservable variables – the output gap and the natural rate of interest – which cannot be estimated precisely.
• ? Second, using models that were designed to predict US policy responses in the 1990s to forecast central banks' behaviour today is likely to be misleading. Meanwhile, inferring central banks' reaction functions from recent policy rate moves to assess the future policy path is fraught with difficulties. Not only have interest rates been broadly unchanged for the bulk of the post‐financial crisis period, but policymakers have provided other forms of policy support.
• ? Third, outside the US at least, Taylor Rules have historically pointed to persistently different policy rates from those observed, yet inflation has been well anchored.
• ? The upshot of all this is that we expect central banks in the advanced economies to err on the side of caution and anticipate interest rates rising less quickly than the consensus amongst economists.

     

Predicting future financial performance of banks from management’s tone in the textual disclosures

Quality & Quantity - Predicting bank performance is important for investors and regulatory authorities. Previous research on non-financial firms has shown that augmenting the numeric...     

Does global inflation help forecast inflation in industrialized countries?

Ciccarelli and Mojon (CM; Review of Economics and Statistics, 2010, 92(3), 524–535) propose an inflation forecasting model incorporating a global inflation factor and show that it consistently beats several standard forecasting benchmarks. We show that CM's global inflation model does not improve upon the Atkeson and Ohanian (AO; Federal Reserve Bank of Minneapolis Quarterly Review, 2001, 25(1), 2–11) naive benchmark. However, we find that augmenting the AO model with a global inflation factor improves forecast accuracy at longer horizons, supporting CM's claim about the usefulness of global inflation.     

Can central banks run out of ammunition? The role of the money‐equities‐interaction channel in monetary policy

Many authorities claim that central banks ‘have run out of ammunition’, either because the central bank rate has dropped close to the zero lower bound or because of Keynes's liquidity trap. I argue first, that indefinitely large increases in the quantity of money remain possible even with the central bank rate close to zero, and, second, that increases in the quantity of money raise all asset prices, including the prices of quoted equities, not just bond prices. Bonds are an unimportant asset class in modern capitalist economies, relative to corporate equity and real estate. Meanwhile increases in equity prices always boost aggregate demand and output.     

What determines inflation in the US,job growth or unemployment?

An empirical investigation of postwar US data reveals that movements in inflation are much more strongly associated with job growth than the unemployment rate. Job growth is found to be strongly related to inflation even after accounting for the effect of the unemployment rate. The residual influence of the unemployment rate on inflation is small, however, after accounting for the effect of job growth. The data shows that in the past inflation has tended to decline when job growth is weak even if unemployment is low. This suggests that the relatively slow job growth of recent years may partly explain the puzzle that, during much of the current expansion, the US economy has experienced little inflation in spite of low unemployment.     

What is the globalisation of inflation?

This paper studies the globalisation of CPI inflation by analysing core, energy and food components, testing for structural breaks in the relationships between domestic inflation and a corresponding country-specific foreign inflation series at the monthly frequency for OECD countries. The iterative methodology employed separates coefficient and variance breaks, while also taking account of outliers. We find that the overall pattern of globalisation in aggregate inflation is largely driven by convergence of the mean levels of the core component from the early 1990s, compatible with the introduction of inflation targeting in many countries of our sample. There is less evidence of increased synchronisation of shortrun movements in core than aggregate inflation, but an increased role for shortrun foreign energy inflation often contributes to the globalisation effect.     

Market microstructure,banks’ behaviour and interbank spreads: evidence after the crisis

We present a study of the European electronic interbank market of overnight lending (e-MID) before and after the beginning of the financial crisis. The main goal of the paper is to explain the structural changes of lending/borrowing features due to the liquidity turmoil. Unlike previous contributions that focused on banks’ dependent and macro information as explanatory variables, we address the role of banks’ behaviour and market microstructure as determinants of the credit spreads. We show that all banks experienced significant variations in their liquidity costs due to the sensitivity of interbank rates to the timing and side of trades. We argue that, while larger banks did experience better funding conditions after the crisis, this was not just a consequence of the “too big to fail” perception of the market. Larger banks have been able to play more strategically when managing their liquidity by taking advantage of the changing market microstructure.

     

Does monetary policy influence banks’ risk weights under the internal ratings-based approach?

This paper studies the extent to which monetary policy may affect banks’ perception of credit risk and the way banks measure risk under the internal ratings-based approach. Specifically, we empirically analyze the effect of different monetary policy variables on banks’ risk weights for credit risk. We present robust evidence of a strong, statistically significant relationship between monetary policy easing and lower implicit risk weights of banks using the internal ratings-based approach. Further, we show that the recent prolonged period of accommodative monetary policy has been instrumental in establishing this relationship. The presented findings have important implications for the prudential authority, which should be aware of the possible side effects of monetary policy on how banks measure risk.     

Workers’ Rights in the QIZs in Jordan

Employee Responsibilities and Rights Journal - This study is an in-depth analysis of workers’ rights in the Qualified Industrial Zones (QIZs) in Jordan. More specifically, it aims to discover...     

Inflation forecasts and core inflation measures: Where is the information on future inflation?

This paper uses the forecast from a random walk model of inflation as a benchmark to test and compare the forecast performance of several alternatives of future inflation, including the Greenbook forecast by the Fed staff, the Survey of Professional Forecasters median forecast, CPI inflation minus food and energy, CPI weighted median inflation, and CPI trimmed mean inflation. The Greenbook forecast was found in previous literature to be a better forecast than other private sector forecasts. Our results indicate that both the Greenbook and the Survey of Professional Forecasters median forecasts of inflation and core inflation measures may contain better information than forecasts from a random walk model. The Greenbook's superiority appears to have declined against other forecasts and core inflation measures.     

Swiss National Bank communication and investors’ uncertainty

This paper analyzes the effects of Swiss National Bank communication on stock investors’ uncertainty. Monetary policy news is identified via changes in short- and medium-term futures prices as well as by applying methods from computational linguistics and dictionary approaches to policy statements. Surprises in policy rate changes and regarding the future path of the policy rate exhibit an asymmetric effect on stock investors’ uncertainty. Moreover, by taking into account various topics addressed in the statements, I show that investors’ uncertainty decreases due to an optimistic tone in communications about economic growth. Increased uncertainty expressed in policy statements translate into increasing stock investors’ uncertainty. The results explain how news contained in monetary policy statements reduce noise in financial markets and therefore contribute to financial stability.     

Assessing the impact of the manufacturing executive’s role on business performance through strategic alignment

Many researchers over time have stressed the importance of incorporating the manufacturing perspective in the formulation of business strategy. Prior work in this area has tended to focus primarily on the involvement of the manufacturing executive in strategic decision making processes, while relatively little attention has been given to the level of influence enjoyed by the manufacturing executives. This study jointly examines the role of both influence and involvement in achieving better business performance, which we posit is expected to occur through alignment between the organizational and manufacturing strategies rather than directly. A research model based on procedural justice and strategic information management literature is proposed to represent this phenomenon. Structural equation modeling is used to empirically test the research model and its related hypothesis on the basis of data collected from 202 senior manufacturing executives representing mid to large sized firms from diverse industry groups across the US. In addition, interviews with a sub-sample of respondents are used to further explore the contextual nature of these relationships. The results indicate that involvement and influence are indeed two different, but highly related, aspects of the manufacturing executive s role. The interviews revealed numerous differences between the two with respect to achieving each and individual benefits derived from them. As expected, both involvement and influence are important determinants of strategy alignment with influence appearing to play a more substantive role. More importantly, it is this alignment that affects business performance. Implications of our findings for improving manufacturing practice, along with possible avenues for future research directions in this area, are also provided.     

What drives household inflation expectations in South Africa? Demographics and anchoring under inflation targeting

Demographic determinants (i.e., gender, income, education, race, age) of one year ahead inflation expectations in South Africa are explored. Surveys covering the period 2006–2016 are examined via a mix of time and cross-sectional methods. In doing so, we uncover clear behavioural biases in how respondents view the inflation outlook. Education and income tend to be inversely related to inflation expectations. This is consistent with the literature, although we observe significant changes over time that many other surveys are unable to uncover. Inflation expectations also respond to recently observed inflation, but this is likely facilitated by priming in the survey since respondents are given the previous year and five years mean inflation rates. Younger individuals have lower inflation expectations and react significantly to central bank communication, which is a novel variable not included in other studies of this kind. Another demographic characteristic interacting with communication by the South African Reserve Bank is race. Finally, the direction of change in inflation, that is, whether it is rising or falling, also matters. Hence, even if respondents are primed, they appear to be aware of changes in the direction of inflation. This represents an additional novel feature of the study.     

Central banks’ interest rate projections and forecast coordination

We apply a simple test to study the effect of the publication of central banks’ interest-rate projections on the coordination of private-sector interest-rate forecasts. Our results indicate that the publication of interest-rate projections does not lead private-sector forecasters to coordinate their forecasts. In fact, private-sector forecasters rather seem to anti-coordinate, that is, they scatter their forecasts around a consensus forecast or around a central bank's interest-rate projections.     

A hazard rate analysis of Russian commercial banks in the period 1994–1997

The number of commercial banks in Russia increased at a fast pace after the 1988 banking reform. Many of these banks lacked supervision and operated with dangerously low funding capital. After the 1995 liquidity crisis, many of these banks disappeared. In this paper, we investigate the determinants of the hazard rates of banks active on the Moscovian deposits market during the 1994–1997 period. We find that market share and duration have negatively affected the hazard rate, while the deposit interest rate has had a positive effect. The market share and interest rate effects are robust to controlling for ‘financial clans’.     

Gauging the uncertainty of the economic outlook using historical forecasting errors: The Federal Reserve’s approach

The Federal Open Market Committee (FOMC) of the U.S. Federal Reserve regularly publishes participants’ qualitative assessments of forecast uncertainty, expressed relative to that seen on average in the past. The benchmarks used for these historical comparisons are the average root mean squared forecast errors (RMSEs) made by various private and government forecasters over the past twenty years. This paper documents how these benchmarks are constructed and discusses some of their properties. We draw several conclusions. First, if past performance is a reasonable guide to future accuracy, considerable uncertainty surrounds macroeconomic projections. Second, different forecasters have similar accuracy. Third, estimates of uncertainty about future real activity and interest rates are now considerably greater than prior to the financial crisis; in contrast, estimates of inflation accuracy have changed little. Finally, fan charts, constructed under certain assumptions and viewed in conjunction with the FOMC’s qualitative assessments, provide a reasonable approximation to future uncertainty.     

Five dimensions of the uncertainty–disagreement linkage

We analyze the relationship between forecaster disagreement and macroeconomic uncertainty in the Euro area using data from the European Central Bank’s Survey of Professional Forecasters for the period 1999Q1–2018Q4 and find that disagreement is generally a poor proxy for uncertainty. However, the strength of this link varies with the dispersion statistic employed, the choice of either the point forecasts or the histogram means for calculating disagreement, the outcome variable considered and the forecast horizon. In contrast, distributional assumptions do not appear to be very influential. The relationship is weaker in subsamples before and after the outbreak of the Great Recession. Accounting for the forecasters’ entry to and exit from the survey has little impact on the results. We also show that survey-based uncertainty is associated with overall policy uncertainty, whereas forecaster disagreement is related more closely to the expected fluctuations on financial markets.