Inflation,relative prices and household saving behavior

This article contains tests for the direct effects of inflation on household saving. Empirical results with cross-country data from five OECD countries indicate that both unanticipated and anticipated inflation affect the household savings ratio. This latter result, which furthermore turns out to be robust in terms of aggregation and additional variables, is clearly at variance with some previous analyses, particularly those of Deaton.     

The Dynamics Between Inflation and Inflation Uncertainty: Evidence from India

This study examines the causal nexus between inflation and inflation uncertainty. In this regard, conventional Generalized Autoregressive Conditional Heteroskedasticity (GARCH) models and Stochastic Volatility (SV) models are used to measure inflation uncertainty and Bai and Perron (Econometrica 66:47–78, 1998; J Appl Econom 18:1–22, 2003) test is used to identify structural breaks in inflation. The empirical evidence derived from the monthly data for the period from June 1961 to April 2011 suggests that the measure of inflation uncertainty obtained from SV model is more reliable than the measure obtained from GARCH model and also the causal nexus between inflation and inflation uncertainty seems to be significantly conditional upon the measure of uncertainty used. The structural break test identifies four episodes of inflation during the sample period, and the causality between inflation and its variability varies across different episodes. The inflation and its variance seem to be independent of each other during the first two regimes that cover the period from 1960 to 1980 and on the contrary, during the later period largely bidirectional causality is observed. Further, inflation seems to exert positive impact on inflation uncertainty, whereas inflation uncertainty has negative impact on inflation.

     

Deposit insurance and bank regulation in a monetary economy: a general equilibrium exposition

Summary. It is commonly argued that poorly designed banking system safety nets are largely to blame for the frequency and severity of modern banking crises. For example, underpriced deposit insurance and/or low reserve requirements are often viewed as factors that encourage risk-taking by banks. In this paper, we study the effects of three policy variables: deposit insurance premia, reserve requirements and the way in which the costs of bank bailouts are financed. We show that when deposit insurance premia are low, the monetization of bank bailout costs may not be more inflationary than financing these costs out of general revenue. This is because, while monetizing the costs increases the inflation tax rate, higher levels of general taxation reduce savings, deposits, bank reserves, and the inflation tax base. Increasing the inflation tax rate obviously raises inflation, but so does an erosion of the inflation tax base. We also find that low deposit insurance premia or low reserve requirements may not be associated with a high rate of bank failure.Received: 2 January 2002, Revised: 1 March 2003JEL Classification Numbers: D5, E5, G1.B. D. Smith: Sadly, our co-author, colleague and dear friend, Bruce D. Smith, died on July 9, 2002.     

An evolutionary theory of the convergence towards low inflation rates

This paper presents an evolutionary interpretation of Barro-Gordons monetary policy game. The model describes a multi-country setup where governments and private agents are boundedly rational players. The behavioral rule of players decisions leads to the imitation of the strategy giving the highest payoff. In this evolutionary monetary policy game, we show how a low inflation state is reached from an international context dominated by inflationary policies. The analysis explains the convergence towards low inflation rates observed during the past twenty years. Moreover, the low inflation state appears to be the long-run equilibrium of the game under some conditions featuring the observed macroeconomic context.JEL Classification: E5, C72, C73 Correspondence to: A. dArtigues     

Inflation Dynamics and its Sources in the Ottoman Empire: 1586–1913

This study examines the dynamics and determinants of inflation in the Ottoman Empire during the 1586–1913 period. There are two possible reasons for inflation: fiscal expansion and monetary expansion, which could be generated through the debasement of local currency (Akçe). We used a set of political and structural variables in order to explain the change in inflation dynamics. In particular, we considered the war years, periods of Ottoman history that show different characteristics (the slow‐down period, the recession period and the break‐up period) and the period of constitutional monarchy. Moreover, we tested whether the inflation process was the same for each sultan and whether each sultan’s behavior during the first year was different from the rest of his reign. The empirical evidence reported here suggests that war accelerated inflation as expected and fiscal expansion rather than the debasement of the Akçe was the main reason for inflation. Moreover, the slow‐down, the recession and the break‐up periods affected inflation positively; both fiscal expansion and the debasement of the Akçe were seen in these three periods as sources of inflation. While employing different inflationary policies during his reign, each sultan accelerated inflation in the first year of his reign by the debasement of the Akçe or by fiscal expansion. Last, the constitutional monarchy period had a significant positive effect on inflation although fiscal expansion, rather than the debasement of the Akçe, was the source of inflation during this period.     

Inflation persistence during periods of structural change: an assessment using Greek data

The paper estimates inflation persistence in Greece from 1975 to 2003, a period of high variation in inflation and changes in policy regimes. Two empirical methodologies, univariate autoregressive (AR) modelling and second-generation random coefficient (RC) modelling, are employed to estimate inflation persistence. The empirical results from all the procedures suggest that inflation persistence was high till 1996, while it started to decline after 1997, when inflationary expectations seem to have been stabilised, and thus, monetary policy was effective at reducing inflation. Empirical findings also detect a sluggish response of inflation to changes in monetary policy. This observed delay seems to have changed little over time.

Impact of foreign prices and interest rates on canadian economy under alternative monetary and exchange rate regimes

The main objective of this paper is to analyze the impact of U.S. short- and long-term monetary policy under both flexible and managed floating systems, using the new CANDIDE Model 2.0. We have also examined the role of domestic monetary policy in the Canadian economy under both fixed and flexible exchange rate systems. The following are some of the important findings of our study:

1. Our results support the traditional view that under the fixed exchange rate regime, monetary authorities cannot successfully pursue an independent monetary policy from its trading partners — an effort to increase money supply will be almost offset by increases in the balance of payments deficit. In contrast, in the flexible exchange rate regime, monetary policy is more effective in producing an increased growth in output and employment. However the increased output growth comes at the cost of higher prices induced by increased wages and a depreciation of the Canadian dollar.
2. Our results suggest that the impact of U.S. interest rates on investment, GNE, employment, productivity, and government debt is less severe in a pure floating exchange rate regime, compared to the managed floating system. However, the impact of U.S. interest rate policy on the Canadian inflation rate is worse in the case of flexible exchange rate regime. Even though real income and inflation are less favourable in both cases, our results indicate a trade-off between output growth and inflation.
3. Our results imply that under a pure floating monetary authorities can determine the long-run rate of inflation in Canada independent of others. However, the United States and Canadian economies are interrelated during the adjustment process, even under the flexible exchange rates, through the terms of trade and the wage-price spiral channels.

     

Growth cycles and inflation in a model of the class struggle

The problems of price and wage inflation and unemployment are discussed here in a context of a model of class struggle developed by R. M. Goodwin. The basic Goodwin model which is an analog of the Volterra-Lotka preypredator model is extended to include actual and anticipated price inflation and excess capacity. Cyclical behavior of labor's share in national income and the employment ratio is studied around a Harrodian steady state. It is found that the presence of money illusion with respect to the actual rate of inflation in the wage bargaining equation is a stabilizing influence. With respect to anticipated inflation, local stability of equilibrium is no longer assured. The implications of this for Phillips curve analysis are also derived.     

The effect of the market-based monetary policy transparency index on inflation and output variability

This paper examines empirically the effectiveness of the Federal Reserve’s policy under different levels of transparency by using a dynamic and continuous market-based index proposed by Kia (2011 Kia, A. 2011. “Developing a Market-based Monetary Policy Transparency Index: Evidence from the United States.” Economic Issues 16 (2): 53–79. [Google Scholar]) on inflation volatility and output volatility. In theory, the more transparent the monetary policy, the less volatile the money market will be with fewer disturbances and thus the more stable will be the economy. First, a bivariate VAR-BEKK-GARCH(1,1) model is estimated for inflation and output variables in the US economy in order to produce conditional variances and covariance over the period October 1982 to December 2011. Second, by incorporating conditional variances and transparency in a VAR model, impulse response functions reveal that after a positive shock in the Federal Reserve’s transparency (i.e. market participants consider the Federal Reserve’s actions to be more transparent), there is a statistically significant decrease in both inflation volatility and output volatility. Our results reveal the dynamic and crucial role that a central bank’s transparency plays in retaining economic stability and assuring the forecasts concerning inflation and economic growth made by the economic units.     

Threshold Effects of Inflation on Economic Growth: Is Africa Different?

This study examines nonlinearities in the inflation-growth nexus in Africa. The study employs a novel dynamic panel threshold regression method developed by Kremer et al. [(2013). Inflation and growth: New evidence from a dynamic panel threshold analysis. Empirical Economics, 44, 861–878. doi:10.1007/s00181-012-0553-9] that extends Hansen’s [(1999). Threshold effects in non-dynamic panels: Estimation, testing, and inference. Journal of Econometrics, 93, 345–368. doi:10.1016/S0304-4076(99)00025-1] non-dynamic panel threshold model as well as Caner and Hansen [(2004). Instrumental variable estimation of a threshold model. Econometric Theory, 20, 813–843. doi:10.1017/S0266466604205011] cross-sectional threshold model to deal with potential endogeneity problems. The findings of this study confirm a non-linear relationship between inflation and economic growth in Africa. More specifically, the results show that the inflation threshold values are 6.7% for the whole sample, 9% for the sub-sample of low-income countries and 6.5% for middle-income countries. The regression results suggest that relatively lower level of inflation appears to be in favor of higher economic growth only in African middle-income countries. However, inflation rate beyond a certain threshold is more likely to be detrimental to economic growth for all the cases. These results are robust by considering additional control variables and using three-year averages of the data. The findings of this study may be useful to African monetary policymakers as they decide on inflation targets to adopt to avoid the detrimental effects of high inflation while reaping the growth benefits of low inflation.     

Taylor Rule in Practice: Evidence from Turkey

This paper estimates the backward-looking and forward-looking monetary policy reaction functions of the Central Bank of the Republic of Turkey (CBRT) by considering the post-crisis period from August 2001 to September 2006, with a special emphasis on inflation targeting. Policies which the CBRT applied are analyzed according to the Taylor rule. The empirical results indicate that the CBRT followed the Taylor rule in its interest setting behaviour. In forward-looking models, the response coefficient of inflation and the output gap is greater than that of backward-looking models. The results of forward-looking models reflect, the policies conducted in Turkey. In the post-crisis period, expected inflation has been the main reaction variable for the CBRT. This suggests that monetary policy over the post-crisis period was not accommodating increases in expected inflation. The main conclusion is that ‘Taylor rule’ based monetary policies were effective in inflation targeting in Turkey.

Towards credibility from inflation targeting: the Brazilian experience

This article analyses the use of the basic interest rate after the adoption of inflation targeting in Brazil and the credibility of this monetary regime through two indices that consider the Cukierman and Meltzer (1986 Cukierman, A and Meltzer, AH. 1986. A theory of ambiguity, credibility and inflation under discretion and asymmetric information. Econometrica, 54: 1099–128. [Crossref], [Web of Science ®] , [Google Scholar]) definition for credibility. It also shows the main theoretical and practical motives for changes in the conduction of the monetary policy in the 1970s; the way that inflation targeting strategy is inserted in rules vs. discretion analysis; and the main points that characterize the literature concerning inflation targeting. The findings denote that the strategy implemented in Brazil is not a good mechanism to develop credibility.     

The joint dynamics of inflation, unemployment and interest rate in the United States since 1980

In this paper, by using a combination of long-run and short-run restrictions, we identify a small structural VECM which includes inflation, unemployment and the federal funds rate and study the dynamic interactions at different frequencies among these variables. Our results show that: (a) in accordance with the traditional view of economic fluctuations, aggregate demand shocks and monetary policy shocks push inflation and unemployment in opposite directions in the short run; (b) the permanent supply shock explains the long-run movement of inflation and unemployment. These conclusions are at odds with the prediction of “natural-rate” models but are consistent with the idea of a propagation mechanism which links productivity shocks to inflation and unemployment at medium and low frequencies. Thus, with respect to some recent studies (e.g. Beyer and Farmer, ECB Working Paper 121, 2002, and Ireland, J Monet Econ 44:279–291, 1999), we offer a different interpretation of the low-frequency comovements between inflation and unemployment characterizing the US economy in the last decades.

Inflation adjustment in the open economy: an I(2) analysis of UK prices

This paper estimates a cointegrated vector autoregressive (VAR) model for UK data on consumer prices, unit labour costs, import prices and real consumption growth. The estimated VAR indicates that the nominal variables are characterised by I(2) trends, and that a linear combination of these processes cointegrate to I(1). This supports an analysis in which I(1) and I(2) restrictions are imposed. A key finding is that an increase in real import prices reduces productivity adjusted real wages, such that the change in domestic inflation is moderated. This may explain why the depreciation of sterling in 1992 left inflation unchanged.

Applying a microfounded-forecasting approach to predict Brazilian inflation

We investigate whether combining forecasts from surveys of expectations is a helpful empirical strategy for forecasting inflation in Brazil. We employ the FGV–IBRE Economic Tendency Survey, which consists of monthly qualitative information from approximately 2000 consumers since 2006, and also the Focus Survey of the Central Bank of Brazil, with daily forecasts since 1999 from roughly 250 professional forecasters. Natural candidates to win a forecast competition in the literature of surveys of expectations are the (consensus) cross-sectional average forecasts (AF). We first show that these forecasts are a bias-ridden version of the conditional expectation of inflation using the no-bias tests proposed in Issler and Lima (J Econom 152(2):153–164, 2009) and Gaglianone and Issler (Microfounded forecasting, 2015). The results reveal interesting data features: Consumers systematically overestimate inflation (by 2.01 p.p., on average), whereas market agents underestimate it (by 0.68 p.p. over the same sample). Next, we employ a pseudo out-of-sample analysis to evaluate different forecasting methods: the AR(1) model, the Granger and Ramanathan (J Forecast 3:197–204, 1984) forecast combination (GR) technique, a Phillips-curve based method, the Capistrán and Timmermann (J Bus Econ Stat 27:428–440, 2009) combination method, the consensus forecast (AF), the bias-corrected average forecast (BCAF), and the extended BCAF. Results reveal that: (i) the MSE of the AR(1) model is higher compared to the GR (and usually lower compared to the AF); and (ii) the extended BCAF is more accurate than the BCAF, which, in turn, dominates the AF. This validates the view that the bias corrections are a useful device for forecasting using surveys. The Phillips-curve based method has a median performance in terms of MSE, and the Capistrán and Timmermann (2009) combination method fares slightly worse.     

Inventory accumulation and expectations of real income,inflation and interest rates

A model is developed and tested to relate three categories of inventory accumulation to expectations of real income, inflation and interest rates through anticipated real corporate wealth effects. Expected future inflation leads firms to accumulate more inventories in advance financing them by means of ‘liquid’ assets to offset an anticipated loss of real wealth. Expected increases in interest rates have an impact on inventory accumulation opposite to that of expected future inflation. Past wealth effects are also allowed for by means of the accelerator principle. Finally, the growth rate of real income generally has a signifiant influence on inventory accumulation.     

Eine Verallgemeinerung des skandinavischen Modells der Inflation

Summary The Scandinavian Model divides the economy of a small country into two sectors. The exposed sector produces commodities traded on the world market, the sheltered sector produces commodities not traded externally. The E-sector is a price taker, while the price level in the S-sector is set by firms of this sectors. This model developed byO. Aukrust andG. Edgren, K.O. Faxén, C.O. Odhner is generalized by introducing a Phillips relation into the E-sector. The rate of inflation of a small economy thus is influenced by three components: imported inflation, a structural component (due to the Aukrust-EFO-model) and an excess demand component (measured by the rate of unemployment). The model is estimated with OLS and 3SLS (ordinary respectively three stage least squares). The results show that the rate of inflation in Austria during the period 1960–1974 can be fairly well explained by Phillips curve augmented Aukrust-EFO-model.In a final chapter the results of applying the same model to Austria and Sweden are discussed by comparing the respective estimates.     

Exchange Rate Regimes and Inflation: Evidence from India

Abstract

Exchange rate stability is crucial for inflation management as a stable rate is expected to reduce domestic inflation pressures through a ‘policy discipline effect’ – restricting money supply growth, and a ‘credibility effect’ – inducing higher money demand and reduced velocity of money. Alternatively, the ‘impossibility trillema’ of Mundell (1961a Mundell, R. A. (1961a). Capital mobility and stabilization policy under fixed and flexible exchange rates. Canadian Journal of Economics and Political Science, 29, 475–485. doi: 10.2307/139336[Crossref], [Web of Science ®] , [Google Scholar], 1961b Mundell, R. A. (1961b). Flexible exchange rates and employment policy. Canadian Journal of Economics and Political Science, 27, 509–517. doi: 10.2307/139437[Crossref], [Web of Science ®] , [Google Scholar]) predicts that in the presence of an open capital account, a stable exchange rate may lead to lack of control on monetary policy and, hence, higher inflation. Using a monetary model of Inflation, this paper investigates the impact of the ‘empirically-claimed’ de facto stable exchange rate regime on inflation in India during different sub-periods of exchange rate stability. The results show that the impact of exchange rate regime on inflation is not visible in the Indian case, which could be because of the offsetting sterilization policy undertaken by the Reserve Bank of India (RBI) during expansionary money supply growth resulting from its large-scale intervention to even out exchange rate volatility.     

Inflation and growth: new evidence from a dynamic panel threshold analysis

We introduce a dynamic panel threshold model to estimate inflation thresholds for long-term economic growth. Advancing on Hansen (J Econom 93:345–368, 1999) and Caner and Hansen (Econom Theory 20:813–843, 2004), our model allows the estimation of threshold effects with panel data even in case of endogenous regressors. The empirical analysis is based on a large panel-dataset including 124 countries. For industrialized countries, our results confirm the inflation targets of about 2% set by many central banks. For non-industrialized countries, we estimate that inflation rates exceeding 17% are associated with lower economic growth. Below this threshold, however, the correlation remains insignificant.     

Interest rate assumptions and predictive accuracy of central bank forecasts

The interest rate assumptions for macroeconomic forecasts differ among central banks. Common approaches are given by the assumptions that interest rates remain constant over the forecast horizon, follow a path as expected by market participants or follow a path as expected by the central bank itself. Theoretical papers such as Svensson (The instrument-rate projection under inflation targeting: the Norwegian example. Centre for European Policy Studies Working Paper (127), 2006) and Galí (J Monet Econ 58:537–550, 2011) suggest an accuracy ranking for these forecasts, from employing central bank expectations yielding the highest forecast accuracy to conditioning on constant interest rates yielding the lowest. Yet, when investigating the predictive accuracy of the Bank of England’s and the Banco Central do Brasil’s forecasts for interest rates, inflation and output growth, we hardly find any significant differences between forecasts based on the different interest rate paths. Our results suggest that the choice of the interest rate assumption appears to be of minor relevance empirically.