New tips from TIPS: Identifying inflation expectations and the risk premia of break-even inflation

This paper decomposes the break-even inflation rates derived from inflation-indexed bonds into inflation risk premia, liquidity risk premia, and inflation expectations. I estimate a common factor model with autoregressive conditionally heteroscedastic (ARCH) errors that extracts co-movements from twenty-two monthly and quarterly indicators to identify these three components. The results indicate that the sharp declines in the 10-year and 5-year break-even inflation rates in 2009 reflect a substantial increase in liquidity risk rather than a decrease in inflation expectations. Break-even inflation rates underestimate inflation expectations over nearly the entire sample due to the liquidity risk premia carried by the inflation indexed bond yields. Also, the model-implied inflation expectations show better forecast performance for the average annual inflation rates than raw break-even inflation rates, the Survey of Professional Forecasters, and the Surveys of Consumers inflation forecasts.     

Inflation perceptions and expectations in Sweden – Are media reports the missing link?

We analyze the interrelation between consumers' quantitative inflation perceptions and expectations as well as actual inflation rates in Sweden. The role of media reports about inflation is emphasized. Structural vector error correction models show stable cointegration between actual, perceived and expected inflation. Impulse responses and forecast error variance decompositions suggest strong interaction between perceived and expected inflation, with a lesser role for actual inflation. Media effects are generally small, but imply an asymmetric reaction of inflation expectations and perceptions to news on increasing vs. decreasing inflation. Thus, to anchor inflation expectations, central banks should explore better communication channels to inform consumers about actual inflation.     

中国核心通货膨胀的估计

准确地测度通货膨胀是认识一般价格水平的变化状况和制定反通货膨胀政策措施的基础。然而,现在被广泛用来测度通货膨胀的RPI或CPI及其对它的改进与通货膨胀的经济内容不一致。这就使得在这些方法下测度的通货膨胀不可能准确地反映实际通货膨胀的状况。于是,本文依据货币数量论提出了一种利用长期识别限制的结构性向量自回归模型来测度核心通货膨胀的新方法。在这个方法里,核心通货膨胀被定义为货币冲击引起的一般价格水平的变化。从向量自回归模型中识别出来的货币冲击和一般价格水平对货币冲击的反应函数被用来构造RPI或CPI变化率由货币冲击引起的成分,这样测度的核心通货膨胀与货币主义理论下通货膨胀的经济内容完全一致。用这种方法估计1954-2002年间中国核心通货膨胀过程中所提供的经济证据表明,我们对核心通货膨胀的定义和估计方法看起来非常合理。而且,测度的结果还能够帮助我们认识我国历史上每一次通货膨胀和通货紧缩的形成机制。     

Interest rate movements and US consumers’ inflation forecast errors: is there a link?

The Fisher effect maintains that movements in short-term interest rates largely reflect changes in expected inflation. Since expected inflation is subject to error, we ask whether interest rates move in response to over- and under-predictions of inflation. In answering, we measure expected inflation by the consumers’ forecast of inflation derived from the Michigan Surveys of Consumers (MSC). Our findings for 1978–2013 indicate that the MSC inflation forecasts were unbiased, efficient, and directionally accurate. For 1978–2007, (i) interest rates moved downward (upward) in response to MSC over-predictions (under-predictions) of inflation, and (ii) MSC inflation forecast errors had directional predictability for interest rates. However, no link between interest rate movements and MSC inflation forecast errors is detected for 2008–2013 when monetary policy kept short-term interest rates unusually low.     

Understanding survey-based inflation expectations

This paper examines the behavior of inflation expectations in the United States. After documenting deviations from rationality in survey-based inflation expectations, I apply a model selection algorithm, boosting, to the inflation expectations of households and professionals. The algorithm builds a regression-like model of expected inflation using a large panel of macroeconomic data as possible covariates. The algorithm achieves a very strong fit in-sample, and finds that the inflation expectations of households correlate with different macroeconomic variables from the expectations of professionals. However, it is difficult to exploit the predictability of inflation expectations in order to improve forecasts of the realized inflation.     

Instability of the Inflation–Output Trade‐Off and Time‐Varying Price Rigidity

This paper studies the time instability of the Phillips curve by paying particular attention to the inflation environment and price stickiness. We identify various inflation episodes and investigate the changing nature of the curve across these periods for five advanced countries over 1960–2013. We show that the mean inflation, the slope of the curve and the threshold mean inflation that erodes price rigidity are time varying. The inflation environment is a key determinant of the inflation–output relationship, rejecting the evidence of a flat curve and restoring the inflation–output trade‐off above certain inflation thresholds.     

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.     

Inflation targeting and expectation anchoring: Evidence from developed and emerging market economies

Inflation expectations can be inferred from treasury yields data. Previous studies utilizing such data have found evidence for the role of inflation targeting in anchoring inflation expectations in a number of developed market economies. The goal of this paper is to extend the evidence for emerging market economies. We estimate inflation expectations from nominal treasury yields data and infer the anchoring of inflation expectations from the sensitivity of inflation expectations to current inflation rates. Our analysis shows that the effect of inflation targeting is statistically significant in emerging market economies as well as in developed market economies and that the magnitude is marginally greater in the former. Our results are robust to alternative specifications.     

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.     

Time-Varying Relationship between Inflation and Inflation Uncertainty

This paper investigates whether the relationship between inflation and inflation uncertainty has changed and whether the change in this relationship has been gradual or abrupt. We extend the time-varying parameter with stochastic volatility in mean model (TVP-SVM) to include a mixture innovation disturbance in the time-varying parameter process. The proposed model produces more reliable estimates and allows us to investigate the occurrence of breaks in the gradually evolving process of the time varying coefficients. Using data of US, Germany, Canada, New Zealand, UK, France, Italy, Spain and Australia, we find that: (i) the relationship between inflation and inflation uncertainty substantially varies over time; (ii) there is strong support for the existence of abrupt changes in the US inflation–inflation uncertainty relationship; (iii) our empirical results of Canada and New Zealand show that the correlation between inflation and inflation uncertainty has been much weaker since early 1990s, which coincides with the timing of the implementation of inflation targeting.     

Inflation tax in the lab: a theoretical and experimental study of competitive search equilibrium with inflation

In this paper we measure the effect of the inflation tax on economic activity and welfare within a controlled setting. To do so, we develop a model of price posting and monetary exchange with inflation and finite populations. The model, which provides a game–theoretic foundation to Rocheteau and Wright (2005)׳s competitive search monetary equilibrium, is used to derive theoretical propositions regarding the effects of inflation in this environment, which we test with a laboratory experiment that closely implements the theoretical framework. We find that the inflation tax is harmful – with cash holdings, production and welfare all falling as inflation rises – and that its effect is relatively larger at low inflation rates than at higher rates. For instance, for inflation rates between 0% and 5%, welfare in the two markets we consider (2[seller]×2[buyer] and 3×2) falls by roughly 1 percent for each percentage–point rise in inflation, compared with 0.4 percent over the range from 5% to 30%. Our findings lead us to conclude that the impact of the inflation tax should not be underestimated, even under low inflation.     

中国是否存在最优通货膨胀区间——通货膨胀和经济增长关系实证研究

利用门限回归模型(threshold regression model)分析中国通货膨胀与经济增长之间的关系,实证研究发现中国通货膨胀对经济增长的影响不是单一形态,而是具有非线性特征。中国经济存在最优通货膨胀区间1.4%～5.1%,而当通货膨胀高于5.1%或低于1.4%时,通货膨胀(通过影响生产要素)对经济增长有负的影响。     

论通货膨胀会计对传统会计基本理论和方法的推动和发展

通货膨胀直接干扰了人们对企业经济活动的正确判断。2007年美国次贷危机爆发以来,我国也面临着巨大的通货膨胀压力。运用通货膨胀会计可以提高会计信息的质量。一直以来,我们国家人民币形成了外升内贬的奇怪情况,持续上涨的物价水平严重困扰着政府的决策者和企业的经营发展。越来越多的企业开始研究和探讨通货膨胀会计。我国通货膨胀会计模式的研究应未雨绸缪,而西方发达国家通货膨胀会计研究和实施经验对我国也有积极的借鉴意义。     

Inflation illusion and the Taylor principle: An experimental study

We develop a simple experimental setting to evaluate the role of the Taylor principle, which holds that the nominal interest rate has to respond more than one-for-one to fluctuations in the inflation rate to exert a stabilizing effect. In our setting, the average inflation rate fluctuates around the inflation target if the computerized central bank obeys the Taylor principle. If the Taylor principle is violated, the average inflation rate persistently deviates from the target. These deviations from the target are less pronounced, if inflation rates cannot be as readily observed as nominal interest rates. This result is consistent with the interpretation that subjects underestimate the influence of inflation on the real return to savings if the inflation rate is only observed ex post.     

A time-varying volatility approach to modeling the phillips curve: A cross-country analysis

This research examines the Phillips curve price adjustment mechanism allowing for the conditional variance of inflation to be time varying. Specifically, we estimate ARCH and GARCH models of inflation for Canada, Japan, and the U.K. The results suggest that an increase in the conditional variability of inflation leads to higher levels of inflation. In addition, inclusion of inflation variability in the Phillips curve model results in a higher weight being attributed to the output gap than in traditional models. (JEF E24)     

本轮通货膨胀的成因及对策

文中对中国目前通货膨胀的形成原因进行了分析,认为本轮通货膨胀的类型是成本推动型,提出了要谨防由结构性通货膨胀演变为全面通货膨胀,并从货币政策和财税政策两个方面分析如何应对本轮通货膨胀。     

The Outlook for Wages

Price inflation is on the way down The most dramatic evidence of this is the fall in retail price inflation as the VAT effect comes out of the index. But as the Charts overleaf show, there are clear signs of a fall in inflation rates in wholesale output prices and, more strikingly still, in manufacturers' input prices.
This may be good news for consumers, but so far any reduction in inflation has been chiefly at the expense of profit margins as price rises have fallen below the increase in wage costs. The question for the immediate future is whether the fall in price inflation will now lead to a fall in wage inflation     

Disaggregate evidence on the persistence of consumer price inflation

This paper uses disaggregate inflation data spanning all of consumption to examine: (i) the persistence of disaggregate inflation relative to aggregate inflation; (ii) the distribution of persistence across consumption sectors; and (iii) whether persistence has changed. Assuming mean inflation to be unchanged, disaggregate persistence inflation is consistently below aggregate persistence. Taking into account an early 1990s shift in mean inflation identified by break tests yields much lower estimates of both aggregate and disaggregate persistence for 1984–2002. But with the mean break, average disaggregate persistence is actually as great as aggregate inflation persistence. A factor model provides a natural framework for interpreting the relationship between aggregate and disaggregate persistence. Copyright © 2006 John Wiley & Sons, Ltd.     

Catching-up and inflation in Europe: Balassa–Samuelson, Engel's Law and other culprits

This study analyses the impact of economic catching-up on annual inflation rates in the European Union with a special focus on the new member countries of Central and Eastern Europe. Using an array of estimation methods, we show that the Balassa-Samuelson effect is not an important driver of inflation rates. By contrast, we find that the initial price level and regulated prices strongly affect inflation outcomes in a nonlinear manner and that the extension of Engel's Law may hold during periods of very fast growth. We interpret these results as a sign that price level convergence comes from goods, market and non-market service prices. Furthermore, we find that the Phillips curve flattens with a decline in the inflation rate, that inflation is more persistent and that commodity prices have a stronger effect on inflation in a higher inflation environment.     

Inflation targeting and monetary policy in Canada: What is the impact on inflation uncertainty?

Inflation uncertainty has been demonstrated both theoretically and empirically to lower real output. This paper examines the impact of inflation targeting in Canada on inflation uncertainty, as well as persistence. Our results indicate that inflation targeting lowered inflation persistence, but actually increased uncertainty. Such an effect may be due to the failure of the previous formal target, the M1 money supply, to successfully combat inflation.