On the real effects of inflation and inflation uncertainty in Mexico

We estimate an augmented multivariate GARCH-M model of inflation and output growth for Mexico at business cycle frequencies. The main findings are: (1) inflation uncertainty has a negative and significant effect on growth; (2) once the effect of inflation uncertainty is accounted for, lagged inflation does not have a direct negative effect on output growth; (3) However as predicted by Friedman and Ball, higher average inflation raises inflation uncertainty, and the overall net effect of average inflation on output growth in Mexico is negative. That is, average inflation is harmful to Mexican growth due to its impact on inflation uncertainty. (4) The Mexican Presidential election cycle significantly raises inflation uncertainty both during the year of the election and the year following the election which has correspondingly negative effects on output growth.     

Exchange rates,inflation and growth in small,open economies: a difference-in-differences approach

Financial crises in emerging markets have led many observers to recommend abandoning fixed exchange rates and adopting more flexible regimes. Moreover, some recent research suggests that the correct exchange rate regime may have a significant effect on inflation and even economic growth. The estimated effect found in such studies, however, likely suffers from an upward bias, as countries which choose a given exchange rate regime have other hard-to-measure policies and attributes which also affect economic performance. Utilizing a recent data set on actual, as opposed to official exchange rate regimes, this article employs the difference-in-differences method, currently popular in applied microeconomics, to a set of emerging markets that switched to more flexible currency policies. Results indicate that, contrary to previous studies, exchange rates themselves exert no significant impact on inflation or output.     

Income effects on the trade balance in small open economies

The objective is to determine the causes of the countercyclicality of the trade balance in five small open economies, namely Austria, France, Italy, Spain, and Switzerland. In order to investigate the role of permanent and temporary changes in income in the determination of the trade balance, Blanchard-Quah variance decomposition procedure is applied. The results of analysis support the conclusion that transitory income shocks are major reasons for the change in the trade balance, and that negative correlation between the trade balance and income is primarily due to transitory shocks. Thus, these results are more consistent with intertemporal models with the dichotomous view in which the aggregate demand shocks are responsible for cyclical variations in the trade balance and income and aggregate supply is responsible for the long-run growth of the economy.     

A simple analytical model of the adverse real effects of inflation

Abstract

The essential insight advanced in this paper is that the claim that inflation can impair growth makes most sense in the context of a monetary production economy, wherein a role for money in the determination of real activity is posited from the very start. We construct a model of inflation and growth that distinguishes between the properties of various qualitatively different inflation regimes. It is then shown how some of these regimes, by undermining confidence in various nominal contracts that are central to the process of accumulation in a monetary production economy, can adversely affect growth.     

The Mises-Hayek business cycle theory,fiat currencies and open economies

This paper extends the Mises-Hayek business cycle theory to open economies with fiat currencies. I explore: (1) the problem of domestic versus international monetary policy with fiat currencies in an international setting. (2) How the feedback effects between central banks in the context of an expansionary monetary contributes to extend and transmit a Mises-Hayek business cycle from big economies to small financially integrated economies. I find that a lengthening of the period of production is not the only effect produced on the capital structure, but also a misallocation of capital goods between the production of tradable and non-tradable goods and services and that business cycles can become more severe when there are open economies with fiat currencies.     

Exchange rate and inflation dynamics in dollarized economies

We use a panel of a hundred-plus countries with differing degrees of dollarization to perform an empirical analysis of the effects on inflation of exchange rate depreciations. The results qualify the common view that countries with higher dollarization exhibit higher inflation pass-through. We show that large depreciations tend to generate a negative impact on the pass-through coefficient, this impact being more intense the higher the level of dollarization of the economy. We interpret this as evidence that, in highly dollarized economies, the classic inflationary effects of a real depreciation—higher internal demand and imported inflation—can be offset or diminished by both the larger financial costs and the balance-sheet effect, especially if the depreciation is “large”. Additionally, the exchange rate regime is shown to matter: countries with fixed exchange rates suffer more noticeably the balance-sheet effects of large depreciations.     

On neoinstitutional theory and preclassical economies: mercantilism revisited 1

How and why do economies grow? This paper surveys recent research into preclassical economies, with particular emphasis on the mercantile period as to the adequacy of an answer of this critical question. Historical, 'ideational' and neoinstitutionalist approaches are analyzed as independent explanations for institutional change. While all of these approaches are found to have value, this survey argues that an unabashedly modern version of Marshallian economics has the greatest explanatory power.     

On the determinants of long-run inflation uncertainty: Evidence from a panel of 17 developed economies

Based on a cross section of 17 advanced economies and data for the period 1975 to 2015, we examine how the interaction between monetary policy and macroeconomic conditions affects inflation uncertainty in the long-term. We construct a proxy for the unobservable inflation uncertainty based on the slowly evolving long-term variance component of inflation from a Spline-GARCH model (Engle and Rangel, 2008). We show that long-run inflation uncertainty is high if an inflation-tolerant central bank governor is in power during a period of high inflation, if the policy rate is below the one that is prescribed by the Taylor rule and during times of heightened stock and exchange rate volatility.     

The effects of inflation uncertainty and supply shocks on real interest rates

Increased inflation uncertainty and negative supply shocks have been suggested separately as causes of the 1970s decline in real interest rates. When both factors appear in empirical interest rate models, supply forces exert a statistically significant impact on real rates while the effect of inflation uncertainty is insignificant.     

The effects of expected inflation on real returns in the argentine indexed bond market

A relatively unrestricted market in goverment indexed bonds operated in the high-inflation Argentine economy from 1975 through 1982. The indexed bond yields from this period provide an interesting opportunity to examine the relation between real interest rates and expected inflation. The test results support the hypothesis that expected inflation is a significant source of variation in real interest rates, depressing the real yields on indexed bonds.     

Competition policy in open economies

Abstract

This paper examines aspects of R&;D spillovers across countries, in particular, the role of international trade and human capital as the catalysts for international diffusion of technology. We present a new way of measuring foreign R&;D stocks embodied in foreign intermediate goods and capital equipment, which we argue is free from the criticism of previous measures. With the pooled panel data spanning 1970 through 1995 for 103 countries, we find that the effects of foreign R&;D on total factor productivity growth of both industrial countries and developing countries are substantial and that human capital is the most influential channel for absorbing foreign R&;D spillovers.     

Monetary policy in open economies

The recent literature on monetary policy in open economies has produced a strong presumption in favor of activistic policy and flexible exchange rates. We argue that this result may owe much to the combination of two commonly made assumptions: That nominal goods prices are rigid. And that the monetary authorities have a lot of information about the economy. When the source of nominal rigidity is found in wages and monetary policy is conducted according to less information demanding rules (such as a standard interest rate rule) policies that stabilize the money supply or the nominal exchange rate may perform better.     

Causality between inflation and real growth

The paper investigates inflation-growth causality over 1947–2005 with VARMA-ML-Asymmetric-VGARCH. The results imply that one uncertainty affects positively its level and much less negatively the other level whereas one level influences positively both uncertainties. Friedman's hypothesis was not strongly rejected.     

State-dependent pricing, inflation, and welfare in search economies

We investigate the welfare effects of inflation in economies with search frictions and menu costs. We first analyze an economy where there is no transaction demand for money balances: Money is a mere unit of account. We determine a condition under which strictly positive inflation is desirable. We relate this condition to a standard efficiency condition for search economies. Second, we consider a related economy in which there is a transaction role for money. In the absence of menu costs, the Friedman rule is optimal. In the presence of menu costs, the optimal inflation rate is negative for our numerical examples provided menu costs are small. A deviation from the Friedman rule can be optimal depending on the extent of the search externalities.     

Short-run relations between the real sector and inflation

Zusammenfassung Die österreichische Hartwährungspolitik strebt Geldwertstabilisierung mit dem Zwischenziel einer niedrigen und wenig schwankenden inflationsrate an. Da gleichzeitig das wirtschaftspolitische Endziel der Beschäftigungssicherung verfolgt wird, könnte ein negativer Phillipskurven-Zusammenhang (zwischen Inflationsrate und Arbeitslosenquote) auf einen Zielkonflikt hinweisen. Die Arbeit kommt zu dem Schluß, daß mit der Hartwährungspolitik das genannte Zwischenziel erreicht wurde, daß aber in der kurzen Frist ein negativer Einfluß auf Wirtschaftswachstum und Beschäftigung empirisch nicht nachweisbar ist. Die Untersuchung wird anhand inverser Phillipskurven geführt, in denen eine Variable des realen Sektors als Funktion der Inflationsrate (und diese wiederum in Abhängigkeit von der Währungspolitik) dargestellt ist. Kausalitätstests lassen es gerechtfertigt erscheinen, den kurzfristigen Zusammenhang zwischen realen Variablen und der Inflationsrate in der inversen Form der Phillipskurve auszudrücken.

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List of variables in empirical regressions ALQ unemployment rate, in percent of dependent labour force - AOS unemployed persons minus vacanies, in percent of dependent labour force - AQS seasonally adjustedALQ - BESL logarithm of the number of dependent employees - BL logarithm of real gross domestic product - D73 dummy variable for introduction of value-added tax in 1973 - D84 dummy variable for tax changes at the beginning of 1984 - EP anticipated inflation, as derived from equation (13) - IPL logarithm of industrial production index - PDL logarithm of German consumer price index - PL logarithm of Austrian consumer price index - PML logarithm of Austrian import unit values - RP unanticipated inflation, as derived from equation (13) - S1, S2, S3 seasonal dummies - VALQ deviations from deterministic trend ofALQ - VAQS deviations from deterministic trend ofAQS - VBESL deviations from deterministic trend ofBESL - VBL deviations from deterministic trend ofBL - VIPL deviations from deterministic trend ofIPL - V1, V2, V3, V4 variables of inflation uncertainty (see Note 6) - XRL logarithm of Austrian merchandise exports, in volume terms I gratefully acknowledge valuable comments on a preliminary version of this paper by F. X. Hof and G. Tichy. I am fully responsible, however, for remaining flaws.     

Gains and losses from sectoral relocation: A review of theory and empirics

This paper addresses the distributional consequences of international sectoral relocation. We begin by looking at the gains and losses for individual countries by reviewing the implications, and real-world relevance, of the various trade and growth models that address the issue. In each case, the role of FDI in the process is explored. The second part of the paper reviews the empirical evidence on what becomes of workers whose jobs are displaced by sectoral relocation. The ongoing policy debate on how to minimise the costs of displacement and the length of the adjustment period is also reviewed.     

Long-run growth empirics and new challenges for unified theory

Annual estimates of productivity are reported for periods over 500 years for eight countries and for five other countries over shorter periods. One- and two-break time series models are used to investigate discontinuities in productivity growth. The results support two-break models of long-run productivity and they favour approaches to unified growth modelling with three epochs. However, the lessening of productivity gaps and the decisive shifts to higher productivity occurred in the twentieth century, chiefly in the years around the World War II. The timing of the breaks and the complexity of the historical record highlights a need for unified models to connect more closely with economic history.     

Distributional conflict in small open economies

We aim at a better understanding of the inefficiencies resulting from distributional conflict in small open economies. To this end, a general equilibrium model with the following characteristics is set up: two groups of agents (capitalists and workers), an endogenous income tax, productive government expenditures, social transfers, and an outside option for capital. The overall distributional-conflict inefficiency is decomposed into three components: (i) a fundamental time inconsistency problem; (ii) strategic interaction in the political process; (iii) heterogeneity among individuals and the resulting unavoidable conflict of interest. A numerical exercise (based on OECD data) indicates that the distributional-conflict inefficiency may cause a substantial output loss.     

Tariff strategies and small open economies

In this paper we examine the issue of optimal tariffs for a small economy that trades with a large economy. We define 'small' and 'large' in the sense that the world prices are determined solely by the large country, and, therefore, the small country faces exogenously given world prices. Within this framework it is shown that there exist situations in which the small country has an incentive to behave as a Stackelberg leader by committing itself to a non-zero optimal tariff. Although the small country is unable to directly affect world prices, by pre-committing to a non-zero trade tax it may induce a reduction of the large country's optimal trade tax, thereby indirectly improving its terms of trade and welfare. JEL Classification: F13, F35
Stratégies de droits de douane et petites économies ouvertes. Ce mémoire examine le problème des droits de douane optimaux pour une petite économie qui commerce avec une grande. On définit 'petit' et 'grand' en un sens économique: les prix mondiaux sont déterminés seulement par le grand pays et le petit pays fait face à des prix mondiaux exogènes. A l'intérieur de ce cadre d'analyse, les auteurs montrent qu'il existe des situations dans lesquelles le petit pays est incitéà se conduire en leader à la Stackelberg en s'engageant fermement dans une politique de droit de douane optimal différent de zéro. Même si le petit pays ne peut pas influencer directement les prix mondiaux, en adoptant une politique ferme de droits de douane positifs, il peut amener le grand pays à réduire son niveau de droit de douane optimal, et, ce faisant, améliorer ses propres termes d'échange et son propre niveau de bien-être.     

Inflation in open economies: Supply-determined versus demand-determined models

This paper provides a formal presentation of an increasingly popular pure cost-push model of the international spread of inflation. The model, which is based on the division of the economy into competitive (tradeable) and sheltered (non-tradeable) sectors, has been developed in the Scandinavian countries. The paper then tests the predictive performance of the model against two simple demand-pull explanations and finds that the Scandinavian model is a relatively poor predictor. Next, the implications of the Scandinavian model for price and income elasticities of demand on the two sectors are derived, and in the last section these are used to reinterpret the model as part of a structure including both supply and demand sides.