The Relationship Between Macroeconomic Variables and Relative Price Variability in Greek Agriculture

The purpose of this paper is to present a measure of relative price variability (RPV) among 53 agricultural products and to explore the relationships between RPV, aggregate inflation rate, and changes in economic activity for the period 1962–1997. We also estimate the effects of expected and unexpected components of inflation on price variability. The results show that changes in inflation rate and economic activity have a strong positive effect on RPV, in addition, expected inflation is found to be an important determinant for explaining price variability.     

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.     

Inflation,nominal portfolios,and wealth redistribution in Canada

Abstract This paper quantifies the redistributional effects of inflation in Canada that arise through the revaluation of nominal assets and liabilities. We find that the effects are non‐trivial even for low inflation episodes. The main winners are young, middle‐class households with mortgage debt. The government receives a windfall gain from its long‐term debt. The old, the rich or the middle‐aged, middle‐class lose, largely owing to their holdings of bonds and non‐indexed defined benefit pension assets. Finally, our Canada‐U.S. comparison reveals that the extent of redistributions can be quite different even between countries of similar economic and legal environments.     

Inflation aversion and macroeconomic policy in a perfect foresight monetary model

This paper reexamines monetary non-superneutrality and the optimality of the optimum quantity of money in the money-in-utility Sidrauski model with endogenous fluctuations of the time preference by introducing inflation aversion. It is shown that the long-run superneutrality of the standard Sidrauski model does not hold, and Friedman's optimum quantity of money is not optimal.     

Relative Prices and Inflation Stabilization

When price adjustment is sluggish, inflation is costly in terms of welfare because it distorts various kinds of relative prices. Stabilizing aggregate price inflation does not necessarily minimize these costs, but stabilizing a well‐designed core inflation minimizes the cost of relative price fluctuations and, thus, the cost of inflation.     

A Panel Smooth Transition Approach to Inflation and Relative Price Variability in China

This paper examines the relationship between inflation and relative price variability (RPV) by using provincial level data from China. The data contains three different inflation regimes and evidence of smooth transition is statistically prominent and the province‐specific time‐varying marginal impact of inflation on RPV varies substantially across inflation regimes. The inflation–RPV linkage is stronger when inflation is moderately high, but tends to fade out and might eventually disappear when inflation is steadily low. The policy implication of this result is that inflation targets should be set within a range in which the inflation–RPV link is the weakest (i.e. low‐inflation regime) to minimize undesirable price dispersion induced by inflation.     

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.     

Inflation, investment and economic performance: The role of internal financing

This paper studies a link between inflation and economic activity that is built on two hypotheses. First, firms mitigate informational frictions in financial markets by accumulating retained earnings over a period of time. Second, firms allocate earnings among three competing uses - dividends, current investment, and the accumulation of internal funds - and inflation directly distorts this allocation decision as well as the real value of accumulated internal funds. The model predicts that the level of inflation - both unanticipated and expected inflation - as well as the variability of inflation distort firms’ internal financing decisions, increases frictions in financial markets, reduces the level and efficiency of investment, and reduces aggregate output. The marginal effects of inflation are increasing in the inflation rate.     

Inflation dynamics and the cost channel of monetary transmission

Evidence from vector autoregressions indicates that the impact of interest rate shocks on macroeconomic aggregates can substantially be affected by the so-called cost channel of monetary transmission. In this paper, we apply a structural approach to examine the relevance of the cost channel for inflation dynamics in G7 countries. Since firms’ costs of working capital increase with interest rates, we augment a (hybrid) New Keynesian Phillips curve by including the short-run nominal interest rate. We find significant and varying direct interest rate effects for the majority of countries, including member countries of the EMU. Simulations further demonstrate that the estimated interest rate coefficients can substantially affect inflation responses to monetary policy shocks, and can even lead to inverse inflation responses, when the cost channel is - relative to the demand channel - sufficiently strong.     

Inflation Adjustment and Labour Market Structures: Evidence from a Multi‐country Study*

The impact of labour market structures on the response of inflation to macroeconomic shocks is analysed empirically. Results based on a 20‐country panel show that if labour market coordination is high, the effect on inflation of movements in unemployment, import prices, tax rates and productivity is dampened, both on impact and dynamically. In contrast, monopoly power in labour supply, measured by the percentage unionisation of the workforce, appears to amplify the response of inflation to its reduced‐form determinants. These findings are attributed to the behaviour of wages following movements in demand‐ and supply‐side conditions.     

How Rigid are Nominal Wages? Evidence and Implications for Germany*

Many recent attempts to find evidence on downward nominal wage rigidity in micro data have suffered from problems such as composition bias and the effects of measurement error. In this paper, a model of proportional downward nominal wage rigidity is developed which avoids these problems by taking into account the determinants of wage changes and the measurement process that leads to observable earnings changes. We find a high degree of downward nominal wage rigidity in German micro data. Its real implications for individual expected wage growth, the aggregate wage level and equilibrium unemployment have marked effects for rates of inflation lower than 3 percent.     

Life Cycle Price Trends and Product Replacement: Implications for the Measurement of Inflation

The paper explores the extent to which products follow systematic pricing patterns over their life cycle and the impact this has on the measurement of inflation. Using a large U.S. scanner data set on supermarket products and applying flexible regression methods, we find that on average prices decline as items age. This life cycle price change is often attributed to quality difference in the construction of CPI as items are replaced due to disappearance or during sample rotations. This introduces a systematic bias in the measurement of inflation. For our data we find that the life cycle bias leads to the underestimation of inflation by around 0.30 percentage points each year for the products examined.     

Inflation and Productivity: Empirical Evidence from Europe

The paper investigates the empirical association between inflation and productivity in 15 European countries over the period 1960–97. Modern econometric techniques based on integration and cointegra– tion analysis are used to test for the existence of a long–run relationship between inflation and productivity. Recently developed causality tests for possibly cointegrated VAR models are also applied instead of relying on standard Granger causality tests which are inappropriate in the presence of nonstationary variables.     

Flexible inflation forecast targeting: Evidence from Canada

We test whether the Bank of Canada pursues a flexible inflation forecast target, one that weights output growth as well as inflation. For the period 1996–2007, we find evidence that the Bank did effectively pursue such a target over the forecast horizon of 12 to 18 months. We find the relative weight that the Bank gives to output growth in its target to be positive and statistically significant within the range of 0.2 to 0.4.     

A First Assessment of Some Measures of Core Inflation for the Euro Area

Abstract. Core inflation plays an important role in the deliberations of monetary policy-makers. In this paper we evaluate a number of measures of core inflation constructed using euro-area data. In addition to the traditional exclusion-type core measures, we examine two newer ones, documenting their properties and evaluating their performance in terms of their ability to track underlying or trend inflation in real time. We focus on core measures derived from the Harmonized Index of Consumer Prices (HICP) as the European Central Bank has chosen to define its mandate for price stability in terms of this index, and because this is the only index of consumer prices that is compiled in a comparable manner across all members of the European Union. We document significant excess kurtosis in the cross-section distribution of price changes in the euro area, and show that several categories of prices are more volatile than those typically excluded from traditional measures of core inflation. Contrary to what one might expect, traditional measures of core inflation are not significantly less volatile than headline measures. We document the superior performance of alternative measures of core inflation in tracking trend inflation on average, but show that none of the various measures of core gave significant advance warning of the pickup in trend inflation at the beginning of 1999.     

Time–Space Harmonization of Consumer Price Indexes in Euro-Zone Countries

The objective of this paper is to discuss the possibilities of attaining a time–space harmonization of the consumer price indexes that are elaborated by the 12 European Union (EU) Euro-zone countries and by Eurostat. After focusing on the duality of the time and space domains for price indexes elaboration, the basic elements of the methodology of estimation of consumer price indexes are delineated, both in time and space. Then, the harmonization of formulae and baskets is outlined, with emphasis on the latter. The current system of surveys for price collection is reviewed and its limits are underlined, in order to suggest a methodology for a consumer basket harmonized approach which ensures better harmonized indexes comparability, reduction of list of products, and unification of quality adjustment methods.     

Relative importance of sticky prices and sticky information in price setting

The relative importance of price and information stickiness in price setting to model and explain inflation dynamics is investigated in this study. A structural model of inflation is developed and used which combines two different models of price setting behavior: the sticky price model of the New Keynesian literature and the sticky information model of Mankiw and Reis. In a framework similar to the Calvo model, I assume that there are two types of firms. One type of firm chooses its prices optimally through forward-looking behavior—as assumed in the sticky price model. It uses all available information when deciding on prices. The other type of firm sets its prices under the constraint that the information it uses is “sticky”—as assumed in the sticky information model. It collects and processes the information necessary to choose its optimal prices with a delay. This leads to the sticky price–sticky information (SP/SI) Phillips curve that nests the standard sticky price and sticky information models. Estimations of this structural model show that both sticky price and sticky information models are statistically and quantitatively important for price setting. However, the sticky price firms make up the majority of the firms in the economy. The results are robust to alternative sub-samples and estimation methods.     

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.     

Inflation and economic growth in Latin America: Some panel time-series evidence

In this paper we investigate the role of macroeconomic performance, mainly in terms of rates of inflation, in determining economic growth in four Latin American countries which suffered hyperinflationary bursts in the 1980s and early 1990s, but that also differ in terms of development levels. The data set covers the period between 1970 and 2007, and the empirical results, based on panel time-series data and analysis, confirm the anecdotal evidence which suggests that inflation has had a detrimental effect to growth in the region. All in all, we highlight the fact that excessive inflation has clearly offset the Mundell–Tobin effect and consequently the high costs that inflation has had on economic activity in the region.