A micro-based non-inflationary rate of capacity utilisation as a measure of inflationary pressure: evidence for Austria

We derive a non-inflationary rate of capacity utilisation (NIRCU)—as recently proposed by Köberl and Lein (Can J Econ 44:673–694, 2011)—based on a large Austrian firm-level panel dataset ranging from 1996 to 2011. By conditioning the current capacity utilisation of firms on their current and planned price adjustments, a micro-level NIRCU is defined as the level of capacity utilisation at which there is no need for the firm to adjust its prices. In contrast to other measures of inflationary pressure, this measure (1) is timely available without revisions and (2) does not imply any need for rather arbitrary methods or concepts such as statistical filtering or potential output. In accordance with the results in Köberl and Lein (Can J Econ 44:673–694, 2011), we find that the NIRCU performs well as a driving variable of Austrian inflation in various Phillips Curve estimations. Compared to other inflation driving variables, such as real unit labor cost, the output gap and the unemployment gap, it delivers reasonable parameter estimates which are in line with existing Phillips Curve estimations in the literature.     

Commodity Prices and the Dynamics of Inflation in Commodity‐Exporting Nations: Evidence from Australia and Canada*

A commodity‐price boom is under way. What does this boom mean for inflation in countries with substantial net commodity exports? The answer depends on movements in commodity prices, changes in foreign exchange rates and the determinants of domestic price inflation. We estimate equations to provide indications of the strength of each of these forces for both Australia and Canada. The results show that world commodity prices move pro‐cyclically with world industrial production and that rates of change in commodity prices are directly related to domestic inflation in both countries. However, there is an offsetting impact of exchange‐rate changes, which is strong enough in the case of Australia, but not Canada, to substantially eliminate the inflationary impact of a commodity‐price boom.     

Nominal rigidities and retail price dispersion in Canada over the twentieth century

Abstract We introduce a new data set on over 230,000 monthly prices for 10 goods in 50 Canadian cities over the 40‐year period from 1910 to 1950. This information, coupled with previously published price information from the late twentieth century, allows us to present one of the first comprehensive views of nominal rigidities and retail price dispersion over the past 100 years. We find that nominal rigidities have been conditioned upon prevailing rates of inflation with a greater frequency of price changes occurring in the 1920s and the 1970s. Additionally, the process of retail market integration has followed a U‐shaped trajectory with many domestic markets being better integrated – as measured by the average dispersion of retail prices – at mid‐century than in the 1990s. We also consider the linkages between nominal rigidities and price dispersion, finding results consistent with present‐day data.     

Capacity utilization rates and unemployment rates: are they complements or substitutes in warning about future inflation?

This research examines capacity utilization as a measure of economic slack in the US economy. Many macroeconomists have questioned the use of capacity utilization as a measure of economics slack on several fronts. The first issue revolves around the definition and accuracy of measurement of the capacity utilization rate in the US economy. Since this research use existing Federal Reserve measures of capacity utilization no insights into the definition and measurement issues are offered other than the fact that a consistent role is found for two different Fed measures of capacity utilization in explaining inflation. The second issue effectively involves the concern as to robustness of the link between the capacity utilization rate and inflation. It was found that there is indeed reason for the Federal Reserve to take note of changes in capacity utilization when trying to determine its policy position with regard to inflation. Clearly, the high capacity measure developed in this research offers distinct information about the inflation process. The third issue raises the question as to whether the capacity utilization and unemployment rates are complements or substitutes in the inflation equation. Both rates tend to provide similar information regarding price changes at low levels of aggregate resource usage. However, as resource usage in the economy becomes increasingly close to its maximum potential, the labour market impact on inflation, as capture by unemployment rate measures, is distinctly different from that of capacity constraints. Finally, if the capacity utilization rate is indeed a useful measure of inflationary pressure, is there a threshold level of the capacity utilization rate above which policymakers should become particularly concerned about the potential of accelerating inflation? It was found that across two measures of inflation, the widely discussed capacity threshold level is in the 84-85% range.     

International business cycles and the relative price of investment goods

Abstract Is the relative price of investment goods a good proxy for investment specific technology? We model this relative price in a flexible price international economy with two fundamental shocks, namely, the total factor productivity (TFP) shock and the investment‐specific technology (IST) shock. We show that the one‐to‐one correspondence between the IST shock and the relative price of investment goods breaks down in an international economy because of the short‐run correlation between the terms of trade and the relative price of investment goods. The data congruent negative correlation between the investment rate and the relative price of investment goods thus does not necessarily reflect decline in investment frictions (rise in IST), as suggested by many studies. A calibration experiment with the US data demonstrates that such an inverse relation between rate of investment and the relative price of investment goods basically reflects the positive effect of TFP on the terms of trade for a broad range of economies where the home bias in consumption exceeds investment and there is a sizable adjustment cost of investment.     

Will the (German) NAIRU Please Stand Up?

Abstract. This paper deals with a critical assessment of the ‘non‐accelerating inflation rate of unemployment’ (NAIRU) for Germany. There are quite a few obstacles to perceiving the NAIRU as an easy‐to‐use analytical instrument: the possibility of a non‐vertical Phillips curve, the occurrence of shocks and hysteresis effects, and the (mis‐)measurement of important variables, cointegration issues and a time variability of the NAIRU. A new attempt is made to estimate a NAIRU for Germany using direct measures of inflationary expectations. However, by any method, the NAIRU is very hard to determine and subject to considerable arbitrariness.     

Optimal price‐level drift under commitment in the canonical New Keynesian model

Abstract In both the canonical and many extended versions of the New Keynesian model, optimal monetary policy under commitment implies price‐level stationarity as long as expectations are rational. We show that this is no longer the case if the central bank and private agents make decisions before observing current shocks. The optimal amount of price‐level drift in response to unexpected innovations to inflation is quantitatively important. This result has important implications for monetary policy, including the design of the optimal loss function for the central bank if it cannot commit to its future policies.     

Death and prices

Most experts agree that alcohol abuse has been a major cause of Russia’s soaring mortality rate. But why have ever more Russians been drinking themselves to death? Some attribute this to despair in the face of painful economic change. I present evidence that, in fact, the surge in alcohol‐related deaths – and premature deaths in general – was fuelled by a dramatic fall in the real price of vodka, which dropped 77 percent between December 1990 and December 1994. Variation in vodka prices – both over time and across Russia’s regions – closely matches variation in mortality. Although market competition and weak excise collection help explain the fall in prices, the main reason appears to be populist price regulation during inflationary periods.     

RECURRENT BUBBLES*

We study rational bubbles in a standard linear asset price model. We first consider a class of bubble processes driven by multiplicative i.i.d. shocks. We show that a bubble process in this class either diverges to infinity with probability one, converges to zero with probability one, or keeps fluctuating forever with probability one, depending on investors' “confidence” in expected bubble growth. We call a bubble process having the last property “recurrent.” We develop sufficient conditions for a bubble process to be recurrent when it is driven by non‐i.i.d. shocks, when the risk‐free interest rate is not constant, and when the process is driven by non‐i.i.d. shocks and the risk‐free interest rate is not constant. In the last case we demonstrate via simulation that there can be a prolonged period in which both the bubble and the interest rate stay close to zero.     

ENDOGENOUS TIME PREFERENCE,INTEREST‐RATE RULES,AND INDETERMINACY*

This paper extends the Benhabib et al. flexible‐price, money‐in‐the‐utility‐function model by considering endogenous time preference and re‐examines equilibrium indeterminacy in response to alternative interest‐rate rules. We show that either an active or a passive interest‐rate feedback rule can generate local indeterminacy even if consumption and real money balances are Edgeworth independent. This result is in sharp contrast to that in the related literature. We also find that in the presence of endogenous time preference, local indeterminacy may occur regardless of whether the monetary policy is based on the interest‐rate feedback rule or money growth‐rate targeting.     

Productivity Growth of the Nontradable Sectors in China

Little is known about the total factor productivity of the nontradable sectors in China. In this paper we estimate productivity growth of the nontradable sectors by studying the relative price movements of the nontradable sectors vis‐à‐vis the tradable sectors, i.e. changes in the internal real exchange rate. We find that prices of the nontradable sectors have risen significantly faster than those of the tradable sectors since China's accession to the WTO, and as a result China's internal real exchange rate has appreciated faster than the renminbi real effective exchange rate. We also find that the nontradable sectors have seen much lower productivity growth than the tradable sectors. We argue that it is important to raise China's productivity growth in the nontradable sectors through policy actions to achieve growth rebalancing and containing inflationary pressures in the medium run.     

NOMINAL GDP TARGETING AND CENTRAL BANK CONSERVATIVENESS

In the literature on monetary economics, there is the ‘inflationary bias’ result which predicts that the rate of inflation will be biased towards a higher level under discretionary monetary policy than under a rule‐based policy regime. It is established that a credible nominal target can eliminate this ‘inflationary bias’. In this paper, we examine the case of nominal GDP targeting, which is a rule‐based monetary regime. Depending on the degree of conservativeness by the central bank, we show in a stylized model the choice of different combination of inflation and real GDP targets can still result in an ‘inflationary bias’, and there also exists the possibility of a ‘dis‐inflationary bias’.     

On the Effects of Inflation Shocks in a Small Open Economy

The effects of monetary policies remain always an important topic in macroeconomics. In the literature (closed and open economy), there is no theoretical as well as empirical consensus regarding the effects of monetary policies. In this paper we examine the real effects of inflation in an open economy. Australia is a classic example of a small open economy and is known to exercise inflation targeting. Using quarterly data from Australia and employing vector autoregressive (VAR) analysis, we provide evidence that inflation, both in the short and long run, negatively affects durable and non‐durable consumption and investment, and has a positive effect on the current account. Further, we show that consumption of durable goods is more sensitive than the consumption of non‐durables during the initial periods following inflationary shocks.     

A FURTHER EXAMINATION OF THE PRICE AND VOLATILITY IMPACT OF STOCK DIVIDENDS AT EX‐DATES*

We examine the price and volatility reaction around stock dividend ex‐dates for an Australian sample, over the period January 1992 to December 2000. We find that price reaction around stock dividend ex‐dates provides positive abnormal returns both prior, and subsequent, to the abolishment of par value of shares in July 1998. When we partitioned the sample into financial, industrial non‐financial and mining firms, the price reaction is found to be positive and significant only for industrial non‐financial companies. Volatility of daily returns for periods subsequent to ex‐dates is significantly greater than corresponding periods prior to announcement dates, while cumulative raw returns subsequent to ex‐dates are significantly lower than periods prior to announcement dates for industrial non‐financial companies. The magnitude of the price reaction is statistically significantly related to an increase in the volatility of daily returns and to a reduction in cumulative raw returns subsequent to the ex‐dates, for industrial non‐financial companies. These findings support buying pressure hypothesis suggested by Dhatt et al. (1994, 1996 ).     

FREQUENT NEWS AND PURE SIGNALS: THE CASE OF A PUBLICLY TRADED FOOTBALL CLUB

We use stock market data for Borussia Dortmund GmbH & Co. KGaA – one of the leading German football clubs – for an application of the news model. Owing to the specific characteristics of the news‐generating process, the case of a publicly traded sport club is a very appropriate candidate for testing this model. By applying a traditional as well as a reversed news model, we elaborate whether new information can explain subsequent changes in the stock price of Borussia Dortmund. We find that sport as well as corporate governance‐related variables are important drivers of the stock price.     

Estimated general equilibrium models for the evaluation of monetary policy in the US and Europe

In this paper we derive a general equilibrium model based on optimising behaviour, which also implies a data consistent framework for monetary policy analysis. Specifically, our model accounts for nominal inertia in both price and wage setting as well for habits in consumption. Using US and European data from 1970 to 1998 our parameter estimates reveal that (i) price contracts last for 8 months and 13 months in the US and Euro-area, respectively; (ii) wage contracts have a length of 7 months and 1.75 years in the US and Europe, respectively; (iii) the extent of backward-looking behaviour in price setting is statistically significant in both economies with 41% of price contracts in the US and 28% in the Euro-area set according to a simple rule-of-thumb; (iv) backward-looking wage setting is only present in Europe with 17% of contracts set in a backward-looking manner; and (v) similar habits effects are present in both European and US consumption. Finally, we simulate the effects of monetary policy by considering the impact of a 1 point increase in nominal interest rates for one quarter. Our parameter estimates imply that there is a relatively muted inflationary response to interest rate increases in Europe (price inflation falls by -0.08% in Europe and 0.11% in the US) and there is a correspondingly large output response (-0.2% in the US and -0.6% in Europe).     

Nominal Wage Flexibility and Economic Performance: Evidence and Implications Across Industrial Countries

By considering the theoretical connection between labour and product markets, the paper evaluates the economic relationship of these markets within the contractual wage rigidity New Keynesian explanation of business cycles. The empirical analysis focuses on the short‐run cyclical behaviour of real output, prices and wages for 19 industrial countries. Time‐series and cross‐sectional regressions are estimated. Cross‐sectional cyclical correlations in the labour and goods markets are also evaluated across countries. Consistent with the theoretical predictions, aggregate uncertainty is an important factor in increasing the flexibility of the nominal wage in response to aggregate demand shocks. Wage flexibility accelerates price inflation and moderates the response of real output growth to aggregate demand shocks. Wage flexibility does not appear to be an important factor in differentiating the real and inflationary effects of energy price shocks across countries. Finally, aggregate uncertainty increases the responsiveness of output and price to productivity shocks.     

Real and nominal effects of monetary policy shocks

Abstract.  We employ the identification scheme of Kahn, Kandel and Sarig (2002) to analyse the impact of Canadian monetary policy on ex ante real interest rates and inflationary expectations. First, we decompose nominal interest rates into ex ante real rates and inflationary expectations using the methodology of Blanchard and Quah (1989) . Then we estimate a recursive VAR model with innovations in a monetary aggregate and the overnight target interest rate as alternative measures of monetary policy shocks. We find that a negative policy shock raises both nominal and ex ante real interest rates, lowers inflationary expectations and real industrial output, and appreciates the Canadian dollar.     

Wage setting in the Colombian manufacturing industry

We show that wage setting in the Colombian manufacturing industry is not fundamentally driven by labour productivity in contrast to the standard theoretical prediction. On the contrary, internal institutional arrangements – payroll taxation, the minimum wage or the price wedge between manufacturing and consumption prices – together with a higher exposure to international trade – connected to the increasing globalization of the Colombian economy – appear as the crucial drivers. These findings lead us to question the political strategy followed to attain cost competitiveness in a context of growing exposure to international trade. Implementation of a true wage bargaining system is suggested as a critical policy target to prevent the disruptive economic consequences of the current wage‐setting mechanism and help rebalance the trade deficit.     

Inflation processes in poland during the transformation period

From 1989 to 1997, the price of goods and consumer services rose very quickly under the influence of strong inflationary processes that took place in the Polish economy. Those processes were also present during the time of a centrally controlled economy. However, they did not appear as an open price inflation. This paper presents an analysis of inflationary processes before and during the transformation period. Special attention is paid to measuring inflation and to the utilization value of indices used for this kind of analysis. The most popular measure of inflation is the consumer price index (CPI). This paper presents a few examples of the many uses of the CPI. The focus is on the interpretation of this index which has special characteristics for the systemic transformation period taking place in Poland.