US inflation and output since the 1970s: a P-star approach

US inflation and output developments since the 1970s are considered using the P-star model and the VAR-based Diebold–Yilmaz spillover index approach. Shocks to monetary variables explain a substantial share of US GDP deflator inflation shocks over time, particularly in the late 1980s and early 1990s but also in recent years, a time when quantitative easing was employed by the Federal Reserve. Monetary factors, and not oil shocks, underlie price developments in the 1970s and early 1980s. Monetary shocks’ influence on oil prices has become noticeably stronger over the past ten years or so, supporting the greater attention being paid of late to the impact of the monetary environment on commodity markets. Shocks to the velocity-of-money variable affect output developments, with the exception of the 1970s and early 1980s when inflation shocks and, to a lesser extent, oil inflation shocks dominate the cross-variance share of output gap shocks. After the Volcker disinflation, the influence of both inflation and oil price shocks on the output gap wane and those of velocity gap shocks increase.     

INFORMAL CENTRAL BANK INDEPENDENCE: AN ANALYSIS FOR THREE EUROPEAN COUNTRIES

Changes in formal and informal central bank independence (CBI) in France, Italy and the United Kingdom in the period from the mid-1970s to the 1990s are examined; the major changes occurred in the 1990s, after the disinflations of the 1980s. Broad trends in the informal independence of central banks (CBs), defined as the ability to pursue price stability regardless of the government's preferences, are identified on the basis of a monetary policy narrative and an analysis of a set of qualitative determinants of informal independence. The most important determinants are the social/political acceptance that monetary policy is the sphere of the CB, the existence of anti-inflationary commitments in the form of intermediate targets for monetary policy, the degree of social consensus on the means and ends of macroeconomic policy, and the relative technical expertise of the CB. These broad trends help to explain some of the inflation experience of the 1980s and 1990s, which cannot be understood in terms of changes to formal CBI.     

Inflation volatility,economic growth and monetary policy in Bangladesh

This article provides an overview of the trends and movements of CPI-inflation in Bangladesh since the early 1950s and examines the key issues in rule-based monetary policy for price stability, implying low and stable inflation, in this country. Under a fixed exchange rate system, inflation in Bangladesh was moderately high and volatile during the 1950s and 1960s. Since the country’s independence from Pakistan in 1971, inflation in Bangladesh has remained moderately high on average and highly volatile and persistent under a fixed-pegged exchange rate system or under a managed floating system since 2003. Using data from the early 1970s or earlier depending on data availability, the article undertakes both Granger-causality and the structural vector autoregression (SVAR) analysis with two models. The first model is comprised of such variables as inflation, the real interest rate, the real exchange rate and output growth, and the second model is comprised of the volatilities of money growth, real output growth and inflation. Then, based on the empirical findings, the article concludes that a rule-based monetary policy, namely monetary targeting or inflation targeting, remains appropriate for Bangladesh provided that it adopts a more flexible, if not freely floating, exchange rate system. The article suggests that the use of monetary policy to achieve multiple objectives under a fixed-pegged exchange rate system creates a time-inconsistency problem, reduces monetary policy credibility and makes it (monetary policy) ineffective in lowering inflation and its volatility. Low credibility of monetary policy in particular raises inflation persistence. Within the present monetary-policy framework in Bangladesh, the article illustrates how the fixed-pegged exchange rate system has generated money growth volatility in the presence of large-scale inflows of overseas workers’ remittances and readymade garments export earnings. This does not seem to be a concern of the central bank of Bangladesh (Bangladesh Bank); rather, it (Bangladesh Bank) pursues monetary-base targeting to keep inflation low and stable after considering economic growth. The consequent diminishing credibility of monetary policy has kept inflation volatile and persistent, which has adversely affected economic growth.     

Inflation Targeting and Inflation Persistence

This paper argues that the adoption of an inflation target reduces the persistence of inflation.We develop the theoretical literature on inflation persistence by introducing a Taylor Rule for monetary policy into a model of persistence and showing that inflation targets reduce inflation persistence.We investigate changes in the time series properties of inflation in seven countries that introduced inflation targets in the late 1980s or early 1990s.We find that the persistence of inflation is greatly reduced or eliminated following the introduction of inflation targets.     

中国通胀惯性特征与货币政策启示

通胀惯性与货币政策效果紧密相关。本文应用具有统计无偏性的"Grid Bootstrap"估计法和未知断点结构突变检验法,研究了1980—2007年中国通货膨胀的惯性特征。本文发现,在低通胀环境下通货膨胀仍然呈现相当高的惯性特征,这暗示着我国货币政策的滞后效应依然非常明显,通货膨胀对政策变化的反应速度缓慢。计量结果说明,中央银行至少应该在出现通胀压力前一年采取措施,来应对高通胀惯性环境下的政策滞后效应。因此,新时期货币当局不仅需要保持对通胀抬头趋势的适度警觉,而且应该关注高通胀惯性对政策效果的影响。     

Does Partisan Heritage Matter? The Case of the Federal Reserve

Received evidence suggests that changes in appointer- and overseer-preferencesinfluence monetary policy (i.e., partisan heritage matters).Evidence presented here, on the other hand, is consistent withchanges in the cost of pursuing a common preference influencingpolicy. I draw this evidence from a panel of Federal Open MarketCommittee (FOMC) votes and find support for the following conclusions:(1) Federal Reserve Board (FRB) governors who were nominatedand confirmed by the same party (Republican or Democrat) prefersignificantly looser policy than do other FOMC members. (2)Monetary policy is significantly looser when either party controlsthe oversight mechanism (i.e., the presidency and Senate) thanwhen control is split. (3) Oversight acts less forcefully ondistrict bank presidents than on FRB governors. In short, thepresent evidence suggests that political agents from both partiesprefer loose money and pursue this preference more efficientlywhen their parties are aligned.     

The dissent voting behaviour of central bankers: what do we really know?

We examine the determinants of the dissent in central bank boards voting records about monetary policy rates in the Czech Republic, Hungary, Sweden, the UK and the US. In contrast to previous studies, we consider 25 different macroeconomic, financial, institutional, psychological or preference-related factors jointly and use Bayesian model averaging (BMA) to formally assess the attendant model uncertainty. We find that the rate of dissent is between 5% and 20% for the examined central banks. Our results suggest that most of the examined regressors, including factors that capture the effects of inflation and output, are not robust determinants of voting dissent. This result suggests that unobserved characteristics of central bankers and different communication strategies drive the dissent, rather than the level of macroeconomic uncertainty.     

Monetary policy: Why money matters (and interest rates don’t)

Since the late 1980s the Fed has implemented monetary policy by adjusting its target for the overnight federal funds rate. Money’s role in monetary policy has been tertiary, at best. Indeed, several influential economists suggest that money is irrelevant for monetary policy because central banks affect economic activity and inflation by (i) controlling a very short-term nominal interest rate and (ii) influencing financial market participants’ expectation of the future policy rate. I offer an alternative perspective: Money is essential for monetary policy because it is essential for controlling the price level, and the monetary authority’s ability to control interest rates is greatly exaggerated.     

当前我国货币政策工具选择的依据及运用

2010年我国调整了实施两年多的宽松货币政策,宣布2011年实行稳健的货币政策。使货币政策从宽松转向稳健的最直接原因是目前我国物价上涨加快,资产泡沫化加剧,通胀预期上升。但是,紧缩货币政策工具的力度除了考虑国内物价因素以外,还应考虑到国际因素。当前,外围主要经济体增长率下滑、失业率高企,因而当前甚至今后一段时间内,央行在使用紧缩货币政策工具收紧流动性、防止资产泡沫风险时,应把握好节奏和力度,以防经济硬着陆风险。     

Inflation targeting and the need for a new central banking framework

This article critically analyzes inflation targeting (IT) both theoretically and empirically. IT came into prominence in the 1990s and 1 central bank after another adopted this regime in the 1990s and 2000s. Proponents of IT mainly argued that IT regime was successful on the grounds that it resulted in lower inflation rates and hence better economic performances. However, inflation rates in the world were in a downward trend from the 1980s well into the 2000s, and both IT and non-IT regimes managed to decrease their inflation rates. In addition, focusing too much on price stability through IT paved the way for permanently higher than necessary interest rates and disinflationary “tight” monetary policy periods when inflation rate was above an arbitrarily targeted level. Tight monetary policy can and do affect the real economy negatively and overemphasizing price stability may hurt the economy in terms of lower potential output, decreasing investment and more unequal income distribution. Post Keynesians offer valuable alternatives within the framework of parking-it approach to the existing monetary policy paradigm. Our main conclusion is that central banks should set the policy interest rate as low as possible and keep it there, in line with Keynesian “cheap money” policy.     

Taylor rules and the Great Inflation

Can US monetary policy in the 1970s be described by a stabilizing Taylor rule when policy is evaluated with real-time inflation and output gap data? Using economic research on the full employment level of unemployment and the natural rate of unemployment published between 1970 and 1977 to construct real-time output gap measures for periods of peak unemployment, we find that the Federal Reserve did not follow a Taylor rule if appropriate measures are used. We estimate Taylor rules and find no evidence that monetary policy stabilized inflation, even allowing for changes in the inflation target. While monetary policy was stabilizing with respect to inflation forecasts, the forecasts systematically under-predicted inflation following the 1970s recessions and this does not constitute evidence of stabilizing policy. We also find that the Federal Reserve responded too strongly to negative output gaps.     

The natural rate of interest and the output gap in the euro area: a joint estimation

The notion of a natural real rate of interest, due to Wicksell (Interest and prices. Macmillan, London Translation of 1898 edition, 1936), is widely used in current central bank research. The idea is that there exists a level at which the real interest rate would be compatible with output at its potential level and stationary inflation. Such a concept is of primary concern for monetary policy because it provides a benchmark for the monetary policy stance. This paper applies the method suggested by Laubach and Williams (Rev Econ Stat 85(4):1063–1070, 2003) to jointly estimate the natural real interest rate and the output gap in the euro area using data from 1960 onwards. Our results suggest that the natural real rate of interest has declined gradually over the past 40 years. They also indicate that monetary policy in the euro area was on average stimulative during the 1960s and the 1970s, while it contributed to dampen the output gap and inflation in the 1980s and 1990s. The views expressed in this paper are those of the authors and do not necessarily reflect the opinions of the institutions to which they are affiliated. We are grateful to Siem Jan Koopman for very helpful suggestions and comments. We also thank P. Cour-Thimann, V. Curdia, F. Drudi, S. McCaw, D. Rodriguez-Palenzuela, R. Pilegaard, H. Pill, L. Stracca, T. Laubach, J. C. Williams and the participants of an ECB workshop on natural interest rates.     

Stepping on a rake: The role of fiscal policy in the inflation of the 1970s

The inflation of the 1970s in the US is often discussed as if the only type of policy action that could have prevented the inflation were monetary policy actions and the only type of policy errors that might have induced the inflation were monetary policy errors. Yet fiscal policy underwent dramatic shifts in the 1970s and economic theory makes clear that in an environment of uncertainty about future fiscal policy, monetary policy instruments may lose potency or have perverse effects. This paper documents the vagaries of fiscal policy in this period and argues that people at the time must have been uncertain about fiscal policy's future course. It also lays out a theoretical framework for understanding the effects of fiscal uncertainties on monetary policy and shows that fiscal variables have predictive value in dynamic models, even if traditional monetary policy indicators are included in the system.     

Optimal monetary policy regime for oil producing developing economies: Implications for post-war Iraq

This paper theoretically investigates optimal monetary policy regime for oil producing developing countries. We analyze credibility and reputation of the Central Bank and macroeconomic dynamics under alternative monetary policy regimes. We construct a detailed and realistic model that can be used to analyze macroecomic structure and expectation dynamics of an oil producing open economy. We take into account the asymmetric information between the public and the central bank and theoretically investigate how this asymmetric information impacts the real economy and the credibility of the central bank. The simulation results indicate that central bank achieves higher credibility and lower inflation under dollarization and higher output levels under currency board regime. The model constructed in this paper has many policy implications for oil producing open economies. Using the implications of the model, we make monetary policy regime recommendations for post-war Iraq.     

Monetary aggregates and core inflation: evidence from India

This study constructs a model-based core inflation for India using Divisia monetary aggregates instead of traditional money measures with the methodology proposed by Bagliano and Morana (2003) and evaluates its forecasting abilities. The core inflation derived from Divisia monetary aggregates is found to be a better leading indicator of measured inflation than the core inflation derived from traditional money measures. These results argue for a case in favour of using monetary aggregates in the construction of core inflation for policy purposes.     

Ireland and Switzerland: The jagged edges of the Great Inflation

Ireland and Switzerland both had rising inflation during the early 1970s, but their experiences diverged thereafter, so that they form a rare example of two countries whose inflation rates are poorly correlated with one another over the Great Inflation period. This paper proposes that the monetary policy neglect hypothesis can account for both countries’ experiences. Extensive archival evidence is considered for each country regarding the doctrines that guided 1970s policymaking. This evidence establishes that Switzerland's better record is accounted for by the competition between monetary and nonmonetary views of inflation being resolved earlier and more decisively in favor of the monetary view. In Ireland, by contrast, nonmonetary views of inflation dominated policymaking throughout the 1970s.     

Monetary Policy in Russia: Identifying exchange rate shocks

Russian monetary policy has failed persistently to achieve sustained low inflation, both in absolute terms and relative to the peer group of countries similarly exiting from Soviet-style central planning. This paper explores the reasons for this state of affairs by analysing the kind of monetary policy that has been pursued by the central bank during the period 1995 to 2009. Our contribution is to search for a possible transmission channel between the real interest rate, inflation rate, exchange rate, output growth and foreign reserve growth, after having controlled for the effect of oil price inflation. Using a vector autoregressive model in error-correction form and using sign restrictions methodology, we show that the monetary authorities’ failure to abate double-digit inflation appears to be driven by the policy of exchange rate targeting, as reflected in our identified exchange rate shocks.     

Fiscal limits and monetary policy: default vs. inflation

This paper studies the monetary policy trade-off between low inflation and low sovereign risk in the environment where fiscal authorities fail to fully ensure the sustainability of government debt. Building on the Fiscal Theory of Price Level (FTPL) and the Fiscal Theory of Sovereign Risk (FTSR), this paper differs in its baseline assumption about the monetary policy objective, which is neither to rule out defaults regardless of inflation costs (as in FTPL), nor to follow inflation targeting regardless of associated sovereign risk (as in FTSR). Instead, we study the case in which the central bank controls the risky interest rate to minimize the probability of default while ruling out large inflation hikes. We show that this policy regime can mitigate default risks only when the central bank is expected to allow sufficient increases in inflation. When agents believe that the central bank's tolerance toward inflation hikes has increased, equilibrium risk premium goes down, suggesting that information concerning changes in the central bank's preferences over inflation directly impacts default risks.     

The U.S. inflation process: Does nominal wage inflation cause price inflation,vice-versa,or neither?

Low unemployment has revived concerns about accelerated inflation. This paper examines the relationship between price and nominal wage inflation. It finds that it varies by business cycle. Prior to the great oil shock of 1973, price and nominal wage inflation were unconnected in a Granger-causal sense. In the 1970s, wage inflation caused price inflation. In the 1980s, the relationship reversed and price inflation caused nominal wage inflation. In the 1990s, the pattern has changed again, and there is some weak evidence of bidirectional causality between wages and PPI inflation. However, wages continue to have no impact on CPI inflation, which is widely viewed as one of the Fed's target variables. This suggests that wage inflation should be de-emphasized as a monetary policy information variable.