Euro area inflation: aggregation bias and convergence

Monetary policy of the European Monetary Union targets aggregate euro area inflation. Concerns are growing that a focus on aggregate inflation may cause national inflation rates to diverge. While different explanations for diverging aggregate euro area inflation have been brought forward, the very impact of aggregation on divergence has, however, not been studied. We find a striking difference in convergence depending on the level of aggregation. While aggregate national inflation rates are diverging, disaggregate inflation rates are converging. We find that aggregation appears to bias evidence towards non-convergence. Our results are consistent with prominent theoretical and empirical evidence on aggregation bias.     

Inflation convergence in the EMS: Some additional evidence. A comment

Conclusions As in Caporale and Pittis, this paper finds significant evidence supporting the hypothesis of long-run equilibrium relationships between inflation rates in countries which participate in the ERM. However, the results differ in several important respects. First, the evidence rejects a dynamic specification in terms of inflation differentials against Germany and in at least one important case, Table 5, it is clear that imposing this restriction may lead to invalid inferences on the role of the ERM as a mechanism to achieve inflation convergence. Second, on the issue of German leadership the results given in Tables 4 and 5 suggest that the German inflation rate cannot be considered weakly exogenous. Rather it shares a long-run relationship with inflation in both ERM and non-ERM economies and responds to deviations from these equilibria. Finally, as these results also hold for a sample period twice the length of that used by Caporale and Pittis they cast considerable doubt on their assertion that cointegrating relationships are unlikely to be detected when “the dynamic process of convergence is still going on”.     

German dominance in the EMS

The paper assesses the merit of the view according to which the Bundesbank dominates monetary policy-making in the European Monetary System. Our tests give a strong rejection of German dominance and suggest, instead, that monetary policymaking in the EMS is interactive. There is evidence that the Bundesbank pursues her own policy goals in the longer run. But German independence does not imply German dominance.     

Realignment probabilities and reputation effects in the EMS

This paper examines the existence of reputation effects in theEMS and their impact on the probability of realignment. By reputationeffects we mean effects which, controlling for all other determinantsof realignment, reduce the probability of realignment simplybecause the monetary authorities have avoided realignment inthe past. Our results provide support for the idea that realignmentsare dependent on macroeconomic conditions, as suggested by theory,and hence a country's participation in a target zone systemcould become more credible if macroeconomic conditions are improved.There is less evidence, however, of an independent role forreputation effects.     

Betting on the EMS

Two speculative strategies within the European Monetary System are empirically evaluated. The potential profitability of speculating on a currency's devaluation at a realignment crucially depends on being able to predict timing and magnitude of the parity change. Such opportunity has been eliminated from the system since 1983. For the reverse strategy of borrowing low, investing high, the evidence since 1983 suggests significant profitable opportunities for the weaker EMS countries — Belgium, Denmark, France and Italy — unconditional on knowledge of the timing of realignments. We conclude that this is due to a peso problem type of premium.     

Interest rate causality and asymmetry in the EMS

This paper investigates the hypothesis of an asymmetric EMS under German leadership in the period from 1983 to 1991. The approach adopted was to undertake Granger-causality tests on daily observations of changes in interest rates. For the group of core countries we find that, in recent years, the EMS has operated asymmetrically. This asymmetry has developed over the years and was not evident prior to 1987.     

Annuities and inflation

This paper embodies the views of the author and does not represent the views or policy of the Federal Reserve Bank of New York or the Federal Reserve System.     

Inertial inflation and the Cruzado plan

On 28 January 1986 the Brazilian goverment decided to freeze all prices. This article examines the “heterodox shock” and the development by Brazilian economist of the theory of inertial inflation, which served as a theoretical basis for the shock.     

Political instability and inflation in Pakistan

This study investigates the effects of political instability on inflation in Pakistan. Applying the Generalized Method of Moments technique and using data from 1951 to 2007, we examine this link through two different models. The results of the ‘monetary’ model suggest that the effects of monetary determinants are rather marginal and that they depend upon the political environment of Pakistan. The ‘nonmonetary’ model's findings explicitly establish a positive association between political instability and inflation. This is further confirmed through analysis based on interactive dummies that reveal political instability significantly leading to high (above average) inflation.     

Inflation and inflation uncertainty in the ASEAN-5 economies

This study explores the linkage between inflation and inflation uncertainty in the ASEAN-5 countries over the period 1970:01–2007:12. Inflation uncertainty is estimated as a conditional variance in an AR(p)-EGARCH(1,1) model. Granger causality tests show that rising inflation increases inflation uncertainty and that rising inflation uncertainty increases inflation in all five countries. The ASEAN-5 have had low inflation rates relative to other emerging markets. Thus, our study shows that even in low inflation emerging markets inflation can lead to inflation uncertainty and uncertainty can lead to inflation. Given current inflationary pressures in these countries, our results warn of possible costs of not keeping inflation in check.     

Coffee, money and inflation in Colombia

The purpose of this paper is to analyse the relationship between coffee, money, inflation and international competitiveness in Colombia. The basic hypothesis being investigated is that higher (lower) prices of coffee will tend to result, through the accumulation of international reserves, in higher (lower) inflation. In turn, this higher inflation will generate, for a given rate of devaluation of the nominal exchange rate, a reduction of the real exchange rate, with the consequent loss of competitiveness in the non-coffee tradable goods sector. A ‘Dutch-disease’ type of model is developed to discuss analytically the relationship between coffee prices, money creation and competitiveness in the short and long run. Empirical results for 1952–1980 are presented. These results support the hypothesis that there has been a positive relationship between the price of coffee, money creation and inflation in Colombia.     

Output gaps and inflation in Mainland China

We estimate output gaps using three methods for Mainland China on annual data spanning 1982–2003. The estimates are similar and appear to co-move with inflation. Standard Phillips curves, however, do not fit the data well. This may reflect the omission of some important variable(s) such as the effect of price deregulation, trade liberalisation and/or changes in the exchange rate regime. We re-estimate the Phillips curves assuming that there is an unobserved variable that follows an AR(2) process. The modified model fits the data much better and accounts for some of the surprising features of the simple Phillips curve estimates.     

Notes on output and expectations in the process of inflation

Zusammenfassung Bemerkungen zu Output und Erwartungen im inflation?ren Proze\. — Dieser Aufsatz gibt eine einfache Darstellung einiger dynamischer Aspekte des inflation?ren Prozesses. Das Modell enth?lt das Friedman-Phelps-Konzept der ?natürlichen? Arbeitslosenrate oder — was auf das Gleiche hinausl?uft — das Konzept des ?potentiellen Outputs?, wie es in der um die Erwartungen erweiterten Version der Phillips-Kurve impliziert wird. Der Hauptzweck der Analyse ist es, die genauen Entwicklungspfade des realen und des nominalen Outputs, der realen Kassenbest?nde sowie der tats?chlichen und erwarteten Inflationsraten zu ermitteln. Die sich ergebenden Pfade sind im allgemeinen konsistent mit einigen besonders herausgearbeiteten Fakten. Die Untersuchung betont die Bedeutung von Informationen über den Geldmarkt, den Warenmarkt und die Art des Prozesses der Erwartungsbildung und beleuchtet das Zusammenwirken dieser Faktoren in der Dynamik des inflation?ren Prozesses.

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Résumé Quelques notes sur la production et les attentes en procès d'inflation. — Cet article présente une simple exposition des quelques aspects dynamiques du procès inflationniste. Le modèle personnifie le concept de Friedman-Phelps d'un ?taux naturel de ch?mage? ou équivalentement, le concept de la ?production potentielle? comme impliqué dans la version de la curve de Phillips augmentée par des attentes. Le but essentiel de l'analyse consiste en tracer les exactes voies dynamiques de la production réelle et nominale, des balances des caisses réelles et des taux d'inflation actuels et anticipés. Généralement les voies impliquées sont consistantes avec quelques faits stylisés. L'analyse souligne l'importance des informations concernant le marché d'argent, le marché des matières premières et la spécification du procès par lequel on forme les attentes, et illustre son interaction en dynamismes du procès inflationniste.

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Resumen Notas sobre producciń y expectativas en el proceso de inflación. — Este artículo presenta una exposición simple de algunos aspectos dinámicos del proceso inflacionario. El modelo incluye el concepto de Friedman-Phelps sobre la ?tasa natural de desempleo? o su equivalente, el concepto de ?producción potencial? implicado por la versión de la curva de Phillips aumentada por las aspectativas. E1 objetivo primordial del anĺisis es trazar las trayectorias exactas de la producción nominal y real, de los balances de caja reales y de las tasas de inflación real y anticipada. Las trayectorias implicadas generalmente son consistentes con algunos factores estilizados. E1 anĺisis subraya la relevancia de la información concerniente al mercado del dinero, el mercado de productos y la especificación del proceso por medio del cual se forman las expectativas e ilustra su interacción en la dinámica del proceso inflacionario.

     

Determinants of inflation in India

The paper attempts to identify the determinants of inflation in India in a multivariate econometric framework using quarterly data from Q1: 1996–1997 to Q3: 2013–2014. The identified determinants of domestic inflation such as crude oil prices, output gap, fiscal policy and monetary policy, and their relation with inflation is studied in a structural vector auto regression (SVAR) model. Further, the temporal changes in inflation dynamics are analyzed using a time varying parameter SVAR model with stochastic volatility. It was found that inflation dynamics in India have changed over time with various determinants showing significant time variation in the recent years, particularly after the global financial crisis.     

Special drawing rights and inflation

Zusammenfassung Sonderziehungsrechte und Inflation. — Der Aufsatz überprüft die Frage, ob die Schaffung von Sonderziehungsrechten inflation?re Konsequenzen hat. Es wird ein Modell formuliert und die Analyse auf die Frage konzentriert, in welcher Weise neu geschaffene Sonderziehungsrechte in das monet?re System eines Landes Eingang finden. Die wichtigsten Schlu\folgerungen der Analyse sind: 1. Die blo\e Zuteilung von Sonderziehungsrechten wirkt nicht inflation?r. 2. Das gleiche gilt für die Verwendung von Sonderziehungsrechten. Allerdings erm?glicht diese es, eine hausgemachte Inflation dadurch zu verl?ngern, da\ sie schlie\lich auftretende zus?tzliche Handelsbilanzdefizite abdeckt. Doch selbst dann kann die Schaffung von Sonderziehungsrechten nicht als die Triebkraft der Inflation bezeichnet werden, denn Ursache der Inflation bleibt der Erwerb heimischer Aktiva durch die geldpolitischen Instanzen.

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Résumé Droits spéciaux de tirage et l’inflation. — Cet article réexamine la question si la création de droits spéciaux de tirage entra?ne des conséquences inflationnistes. Un modèle est formulé, et l’analyse est concentrée sur la question de quelle manière des nouveaux droits spéciaux de tirage s’introduisent dans le système monétaire d’un pays. Les conclusions les plus importantes sont: 1. La seule allocation de ces droits n’est pas inflationniste, puisqu’elle n’affecte ni le volume, ni le développement de la base monétaire d’un pays. 2. Il en est de même en ce qui concerne l’utilisation de ces droits, excepté qu’elle permette à un pays de prolonger une inflation nationale en couvrant des déficits de commerce additionnels qui émergeront à la fin. Cependant, ce n’est pas, dans ce cas non plus, la création de droits spéciaux de tirage qui constitue la force motrice de l’inflation; c’est toujours l’acquisition d’actifs nationaux par les autorités monétaires.

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Resumen Derechos especiales de giro e inflacion. — El articulo se ocupa de la pregunta, si la creación de derechos especiales de giro tiene consecuencias inflacionarias. Para ello se construyó un modelo y el análisis se concentró sobre la pregunta, de qué manera la creación de nuevos derechos especiales de giro encuentran cabida dentro del sistema monetario de un país. Las conclusiones más importantes del anàlisis son: (1) La meradistributión de derechos especiales de giro no tiene influencias inflacionarias. (2) Lo mismo vale para lautilization de derechos especiales de giro. Ella permite, sin embargo, prolongar la duración de una inflación de origen doméstico por medio del cubrimiento de deficits de balanza comercial que puedan aparecer. Pero incluso entonces no se puede denominar la utilización de derechos especiales de giro como la fuerza propulsora de la inflación, ya que la causa de ella sigue siendo la compra de activos domésticos por parte de las autoridades monetarias.

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Riassunto Diritti speciali di prelievo ed inflazione. — L’articolo verifica il problema se la creazione di diritti speciali di prelievo abbia conseguenze inflazionistiche. Viene formulato un modello e l’analisi è concentrata sul seguente problema: in che maniera diritti speciali di prelievo di nuova creazione entrano a far parte del sistema monetario di un Paese. Le più importanti conseguenze dell’ analisi sono: (1) La semplice assegnazione di diritti speciali di prelievo non opera in modo inflazionistico. (2) La stessa cosa vale per l’impiego di diritti speciali di prelievo. Certamente questo rende possibile ciò, di prolungare un’inflazione fatta in casa, per il fatto che esso copre in definitiva deficit di bilancia del commercio che compaiono aggiuntivamente. Però anche in questo caso la creazione di diritti speciali di prelievo non può essere definita forza motrice dell’inflazione, poiché causa dell’inflazione rimane l’acquisto di attivi interni da parte delle istanze politico-monetarie.

     

Recession, inflation and the international monetary system

The difficult circumstances being faced by the world economy and its uncertain prospects for the 1980s make it necessary to take a new look at the present financial mechanisms and international institutions for monetary cooperation, with a view to adapting them to current needs and to developments in the near future. The industrial countries will have more modest rates of growth than in earlier decades, and this will have significant consequences for the developing countries: (a) stagnation of official development aid flows; (b) possible intensification of protectionist trends; (c) slow growth of producers of raw materials whose export markets will be seriously limited; (d) gradual shift of world economic and political activity toward oil-producing developing countries and, to a lesser extent, toward the exporters of manufacturers; (e) industrial countries and raw materials producers will become increasingly interdependent; (f) oil-producing and other higher income developing countries will increase their participation in regional economic cooperation and official development aid efforts. Some of the more specific problems which require attention from the international community are inflation and recession; structural disequilibria, recycling and external debt; adjustment process; creation of liquidity and transfer of resources; and participation of the developing countries in the monetary system.