Inflation Expectations, Interest Rates and Arbitrary Income Transfers

Unexpected inflation, disinflation or deflation cause arbitrary income transfers between an economy's borrowers and lenders. This redistribution results from distorted real interest rates that are too high when price level changes are over‐predicted and too low when they are under‐predicted. This article shows that in Australia's case, inflation expectations were mostly biased upwards throughout the 1990s, according to the Melbourne Institute of Applied Economic and Social Research series and to a new derived series based on bond yields, implying that real interest rates were too high over this time. In turn, this caused substantial arbitrary income transfers from debtors to creditors, estimated to have averaged up to 3 per cent of gross domestic product over the period.     

Monetary Policy, Nominal Interest Rates, and Long–Horizon Inflation Uncertainty

Empirical evidence presented in this paper shows that the predictability of inflation at long horizons varies considerably across countries. Both simple theory and empirical evidence suggest that the crucial factor is the extent to which systematic monetary policy succeeds in preventing a unit root in inflation. The mechanism by which it does this appears however to be complicated by strong empirical evidence that nominal as well as real interest rates have real effects, which implies that monetary policy need not be so vigorous in reactions to inflation. This helps to explain why inflation rates in the US and (especially) Germany have been relatively predictable, despite monetary policy rules which appear to have been barely stabilising. The paper also presents tentative evidence that the power of nominal interest rate effects is inversely related to long–horizon inflation uncertainty, and hence ultimately uncertainty about monetary policy.     

Exchange Rates, Nominal Inertia and Inflation

This paper examines the use of the nominal exchange rate in achieving disinflation under managed exchange rate regimes. Most previous empirical studies have not explicitly identified expectations in the wage and price setting behaviour of their econometric models, despite the importance of expectations both during a disinflation and in correcting misalignments. This has meant that costs due to nominal inertia and non-neutralities have not been addressed separately from questions of credibility. We present results for the UK economy using both a theoretical and empirical model in which firms and workers form rational expectations, but where there is also nominal inertia. We identify costs in using the exchange rate to change the inflation rate, and also the costs involved in correcting any disequilibria in the real exchange rate.     

Determinants of Nominal Interest Rates in India

Journal of Quantitative Economics - This paper examines the role of monetary factors in the variation of nominal interest rates in India for the deregulated regime of interest rates and the...     

Inflation Expectations and the Stability Properties of Nominal GDP Targeting

Ball (1999) uses a small closed economy model to show that nominal GDP targeting can lead to instability. This paper extends Ball's model to uncover the role inflation expectations play in generating this instability. Allowing inflation expectations to be formed by the more general mixed expectations process, which encompasses Ball's model, we show that nominal GDP targeting is unlikely to lead to instability. We further show that in Ball's model where exact targeting causes instability that moving to inexact targeting restores stability.     

汇率、利率、税率：名义和实际

当前我国经济运行情况以及面临的问题 过去的一年里，我国经济保持了稳定增长的态势，在全球经济特别是关、日和欧三大经济体同时陷入衰退的情况下，2001年我国国内生产总值达到95800多亿元，同比增长率为7．3％。更令人感到鼓舞的是，中国在2001年加入WTO，正式成为世界贸易组织的一员，中国的对外开放进入了一个新的阶段。 但在成功数字的外表下，我们还应该看到中国经济的一些问题以及在2002年可能遇到或者已经遇到的一些难题。2001年中国经济增长前高后低，四个季度的经济增长一路滑坡，前3个季度的增长速度分别是8．1％、7．8％和7％，第4季度GDP增长也很难达到7％，11月份居民消费价格总水平比去年同月下降3％，又面临通货紧缩的威胁。2001年的经济增长，主要是由国内投资和消费需求的增长拉动的。由于国际经济严重衰退，一方面，我国出口增速下降，大约在6％左右，净出口减少，对经济增长的贡献度为负值；另一方面，促使外资流入加快，实际利用外资增长近20％，减弱了出口下降的影响。……     

Convergence in Interest Rates and Inflation Rates Across Countries and Over Time

We examine the relationship between interest rates and inflation rates for 10 countries during the period 1974–95. We find evidence of a unique cointegrating relationship between nominal interest rates of European Monetary System (EMS) countries, the US and Canada, and the US, Germany, and Japan. No similar relationship is obtained between inflation rates with one exception, namely, that between the US and Canada. We interpret these results as convergence in inflation but not in interst rates. Hence, if interest rates represent an indicator of monetary policy, the countries considered have attempted to implement independent policies but not to an extent which produced divergent trends in inflation.     

Cross-Country Evidence on the Ability of the Nominal Interest Rate to Predict Inflation

This paper examines the viability of using short-term interest rates to forecast inflation as implied by the Fisher hypothesis. A major problem with this approach lies in the implicit assumptions that the real interest rate is constant and that the relationship between inflation and interest rate does not change over time. We demonstrate, using quarterly data for four OECD countries, that by relaxing these assumptions and allowing for seasonality in the inflation rate it is possible to obtain a model with a high degree of forecasting accuracy and efficiency.
JEL Classification Numbers: C22, C52, E31.     

Forward Rates,Interest Rates,and Expectations Under Alternative Exchange Rate Regimes*

A model comprising spot and forward foreign exchange markets and a domestic credit market is used to examine the trade-off between volatility in the nominal exchange rate and domestic interest rate. It also shows how a slowly crawling spot rate can raise interest rate volatility and the amplitude of reserve flows. Finally, the paper extends a finding by Driskill and McCafferty that the exchange rate effects of external shocks are differently affected by the responsiveness of speculation to expected profits; high responsiveness makes the spot exchange rate more sensitive to foreign financial shocks but less sensitive to trade balance shocks.     

The Impact of Inflation Uncertainty on Interest Rates in the UK

This paper assesses the effect of expected inflation and inflation risk on interest rates within the Fisher hypothesis framework. Autoregressive Conditional Heteroscedastic models are used to estimate the conditional variability of inflation as a proxy for risk. With the UK quarterly data from 1958:4 to 1994:4, we found that both the expected inflation and the conditional variability of inflation positively affect the UK three‐month Treasury‐bill rate.     

利率与通货膨胀:一个费雪效应的经验分析

本文应用现代时间序列计量经济学技术，结合中国1979－2000年间的有关数据，进行了费雪效应在中国的实证研究。经验证据表明在这一时期同时存在长期和短期费雪效应。这样，无论在长期还是短期，名义利率的变化主要反映预期通胀而不是实际利率的变化，所以必须慎用名义利率作为货币政策松紧程度的指标。这在政策上可理解为政府为控制通胀而调整利率的一种规则，从而本文的分析对未来利率调整幅度的具体确定与计算有潜在的应用价值。     

Inflation Targeting versus Nominal Income Targeting

In this paper we analyze two different target regimes, flexible inflation targeting and nominal income targeting, under discretion in a simple dynamic macro model. The key results of our paper are: First, for both targeting regimes optimal monetary policy response leads to a shock-dependent feedback rule. Second, a demand shock is completely offset by both monetary strategies. Third, in case of a supply shock there is a significant difference between the two different targeting regimes. Under inflation targeting the policy makers face a trade-off between inflation and output stabilization. This trade-off depends on the weight Φ the policy makers attach to output stabilization relative to inflation stabilization in the loss function. In contrast, under nominal income targeting policy makers face a constant trade-off between inflation and real output growth: an increase in inflation leads to a fall in real output growth by an equal amount. Furthermore, in Appendix A we analyze a (linear) commitment solution for inflation targeting and compare it with the discretionary case. Under commitment, inflation is smaller and the output gap is larger than under discretion. In Appendix B, we investigate inflation targeting in a two-period time-lag version of the model. The qualitative results on the trade-off between inflation and output growth remain the same as in the basic model without time lag. Received May 3, 2000; revised version received December 3, 2001 Published online: February 17, 2003     

The Expectations Theory of the Term Structure of Interest Rates in Australia*

The aim of this paper is to test the expectations theory of the term structure of interest rates in the Australian market for short-term financial assets. The paper finds that the joint hypothesis of the expectations theory and zero (or a constant risk premium) cannot be rejected in the period since the introduction of the tender system for sale of government securities in 1979. The floating of the Australian dollar in 1983 did not alter the findings.     

Productivity Trends in Europe: Implications for Real Exchange Rates, Real Interest Rates, and Inflation

The paper examines a long–run (neoclassical) framework in which differences in productivity growth across sectors and countries lead to inflation differentials. In a currency union, these inflation differentials imply cross–country differentials in real interest rates. The authors estimate the likely size of these differentials for European Union countries, discuss the potential costs of persistent inflation differentials, and comment on the conflicts they may cause within Economic and Monetary Union (EMU). The analytical framework is a variant of the Balassa–Samuelson "productivity hypotheisis," which relates sectoral productivity trends to trends in the relative price of home goods.     

The Relationship between Interest Rates and Inflation: Examining the Fisher Effect in China

This study revisits the Fisher effect using a different empirical method that considers a potential nonlinear relationship between interest rates (treasury bond rates) and inflation in China. The rising uncertainty and asymmetric information in financial markets between bond holders and bond issuers suggest such a potential nonlinear relationship. To this aim, we apply Shin et al.’s (2014) nonlinear autoregressive distributed lag (NARDL) model with asymmetric dynamic multipliers for the sample period 2002M7–2018M4. The empirical findings reveal symmetric and asymmetric partial Fisher effects for all sample bond rates in China. Furthermore, we find that 20-year bond rates experience the lowest partial Fisher effect.     

Artificially Low Interest Rates as Export Promotion Policy

We reconsider the effects of a policy that sets an artificially low interest rate. Such a policy involves a combination of an interest rate ceiling and a rationing rule that assigns a priority‐lending status to export sectors over domestic service sectors. We demonstrate that the policy works as an export‐promotion policy, and improves national income. Furthermore, under some conditions, the policy expands the domestic service sector, despite the reduced amount of funds owing to the rationing rule. Finally, the artificially low interest rate improves national welfare.     

Inflation Expectations and Monetary Policy Surprises*

We estimate monetary policy surprises for European consumers over time, based on monetary policy changes that were unanticipated according to consumers’ stated beliefs. We find that such monetary policy surprises have the opposite impact on inflation expectations from the impact found when assuming that consumers are well informed. Relaxing the latter assumption by focusing on consumers’ stated beliefs, unanticipated increases in the interest rate raise inflation expectations before the 2008 financial crisis. This is consistent with imperfect information theoretical settings where interest rate hikes are interpreted as positive news about the state of the economy by consumers who know that policymakers have relatively more information.     

中国通胀预期的卡尔曼滤波估计

基于可观测的月度通胀率和利率序列，本文设定不可观测的预期通胀率和预期真实利率服从向量自回归过程。在理性预期假定下将该过程改写为状态空间表示，根据卡尔曼滤波算法可推断预期通胀率。经验结果显示，以上预期形成机制假定所产生的预期通胀率是实际通胀率的无偏估计，这同理性预期假定是一致的。该预期机制所产生的方程残差近似服从正态分布，并且预期误差小于其他几种预期机制假定下的结果。本文还估计了预期通胀率对货币需求的影响。     

The Impact of Structure and Openness on The Causal Ordering Of Interest,Inflation and Exchange Rates

Journal of Quantitative Economics - In a country with a very large population at low per capita income, the interaction between the price of food and wages is a major determinant of inflation. But,...