Exchange rate pass-through in deflation: The case of Taiwan

This paper incorporates deflation in an analysis of the relationship between the exchange rate pass-through and inflation. Using a nonlinear model based on monthly data of Taiwan's import prices from 1981 to 2008, we find that the degree of exchange rate pass-through is increasing in deflation. The increase becomes smaller when the price of oil is excluded. Evidence for pass-through increasing in deflation has not previously been found in the existing literature and presents a new understanding of the pricing behavior of firms. Poor profits in deflation cause firms to pass through most of the cost of exchange rate changes to their products to avoid exiting the market.     

On the risk of long-run deflation

I determine expected long-run inflation in a two-state New Keynesian model driven by natural interest-rate uncertainty. Monetary policy switches between discretion in ‘normal times’ and zero-lower-bound episodes when it is passive. Long-run US inflation ranges from −1.8% to +1.2% p.a.     

An empirical investigation of US fiscal expenditures and macroeconomic outcomes

In addition to containing stable information to explain inflation, state-local expenditures also have a larger share of the forecast error variance of US inflation than the federal funds rate. Non-defense federal expenditures are useful in predicting real output variations and, starting from the early 1980s, also present a larger share of the forecast error variance of US real output than the federal funds rate.     

Quality growth: New evidence from Japanese household-level data

This article estimates quality Engel curves for 52 durable goods used to measure quality upgrading in the Japanese CPI between 1990 and 2004. The estimation shows that the unmeasured quality growth is averaging less than 0.1% annually.     

Distribution of wealth and incomplete markets: Theory and empirical evidence

This paper analyses the equilibrium distribution of wealth in an economy where firms’ productivities are subject to idiosyncratic shocks, returns on factors are determined in competitive markets, households have linear consumption functions and government imposes taxes on capital and labour incomes and equally redistributes the collected resources to households. The equilibrium distribution of wealth is explicitly calculated and its shape crucially depends on market incompleteness. With incomplete markets it follows a Paretian law in the top tail and the Pareto exponent depends on the saving rate, on the net return on capital, on the growth rate of population, and on portfolio diversification. The characteristics of the labour market crucially affects the bottom tail, but not the upper tail of the distribution of wealth in the case of completely decentralized labour market. The analysis also suggests a positive relationship between growth and wealth inequality. The theoretical predictions find a corroboration in the empirical evidence of United States in the period 1989-2004.     

Some international evidence on the Lucas Supply Function

We provide empirical evidence on the Lucas Supply Function based on actual inflation surprises for 19 industrial economies. Our results show that the inflation surprise positively correlates with the output gap and that this relationship is negatively related to inflation variability.     

The hump-shaped behavior of inflation and a dynamic externality

We propose a general equilibrium model that explains the empirical evidence of the hump-shaped response of inflation to a monetary policy shock. The model replaces backward-looking indexation à la Christiano et al. [2005. Nominal rigidities and the dynamic effect of a shock to monetary policy. Journal of Political Economy 113(1), 1-45] with a dynamic externality into the production function of firms. The model, armed with sticky wages and variable capital utilization, has two offsetting effects on real marginal cost over the business cycle. First, increasing factor prices raise real marginal cost in response to an expansionary monetary policy shock in the intermediate run. Second, a dynamic externality reduces real marginal cost in the short run because it raises productivity in response to an increase in output following the shock. Overall, the resulting short-run decrease and intermediate-run increase in marginal cost replicate the hump-shaped behavior of inflation under purely forward-looking price and wage Phillips curves.     

Further evidence regarding nonlinear trend reversion of real GDP and the CPI

This paper examines whether the CPI and real GDP for the US exhibit nonlinear reversion to trend as recently concluded by Beechey and Österholm [Beechey, M. and Österholm, P., 2008. Revisiting the uncertain unit root in GDP and CPI: testing for nonlinear trend reversion. Economics Letters 100, 221-223]. The wild bootstrap is used to correct for non-normality and heteroscedasticity in a nonlinear unit root test. The use of ‘wild bootstrapped’ critical values affects test conclusions in some cases. Results also are sensitive to the sample period examined.     

Inflation and Relative Price Variability in a Low Inflation Country: Empirical Evidence for Germany

Abstract. The recent literature on the welfare cost of inflation emphasizes inflation's effect on the variability of relative prices. Expected and unexpected inflation have both been proposed to increase relative price variability (RPV) and, thereby, to distort the information content of nominal prices. This paper presents new evidence on the impact of inflation on RPV in Germany. Our results indicate that the influence of expected inflation disappears if a credible monetary policy stabilizes inflationary expectations on a low level. Yet the significant impact of unexpected inflation suggests that even low inflation rates can lead to welfare losses by raising RPV above its efficient level.     

The design of monetary and fiscal policy: A global perspective

We study the emergence of multiple equilibria in models with capital and bonds under various monetary and fiscal policies. We show that the presence of capital is indeed another independent source of local and global multiplicities, even under active policies that yield local determinacy. We also show how a very similar mechanism generates multiplicities in models with bonds and distortionary taxation. We then explore the design of monetary policies that avoid multiple equilibria. We show that interest rate policies that respond to the output gap, while potentially a source of significant inefficiencies, may be effective in preventing multiple equilibria and costly oscillatory equilibrium dynamics.     

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.     

Investment and interest rate policy: a discrete time analysis

This paper analyzes the restrictions necessary to ensure that the interest rate policy rule used by the central bank does not introduce local real indeterminacy into the economy. It conducts the analysis in a Calvo-style sticky price model. A key innovation is to add investment spending to the analysis. In this environment, local real indeterminacy is much more likely. In particular, all forward-looking interest rate rules are subject to real indeterminacy.     

The choice of exchange rate regime: An empirical analysis for transition economies*

We analyze the choice of exchange rate regimes of the 25 transition economies in Europe and the CIS after 1990. The empirical results show that the traditional Optimum Currency Area considerations provide relevant guidance for the regime choices in these countries. Moreover, regime choices are influenced by inflation rates, cumulative inflation differentials, and international reserves sufficiency. That is, macroeconomic stabilization and the ability to commit to exchange rate pegs also play important roles. Large government deficits have ambiguous effects; they increase the likelihood of moving from flexible to intermediate regimes as well as that of moving from fixed to intermediate ones.     

The empirical validity of the New Keynesian Phillips curve using survey forecasts of inflation

This paper investigates the performance of the New Keynesian Phillips curve when survey forecasts of inflation are used to proxy for inflation expectations. Previous authors such as Brissimis and Magginas (2008) have applied survey measures of inflation expectations to the NKPC, and have concluded that these estimates are superior to those estimated using actual data on future inflation. However this approach employs the use of the labor income share as the proxy for real marginal cost, something which is highly problematic once we consider the countercyclicality of this variable. This paper develops and tests a procyclical marginal cost variable alongside various survey measures of inflation forecasts in the NKPC, while recognizing the problem of weak instruments that occurs when estimating the model using conventional GMM. We find that the NKPC produces a counter-intuitive negative and significant coefficient on procyclical marginal cost when surveys of inflation forecasts are used, which casts serious doubt on the empirical viability of the NKPC model, even when estimated with survey inflation forecasts.     

The political economy of seigniorage

While most economists agree that seigniorage is one way governments finance deficits, there is less agreement about the political, institutional and economic reasons for relying on it. This paper investigates the main political and institutional determinants of seigniorage using panel data on about 100 countries, for the period 1960–1999. Estimates show that greater political instability leads to higher seigniorage, especially in developing, less democratic and socially-polarized countries, with high inflation, low access to domestic and external debt financing and with higher turnover of central bank presidents. One important policy implication of this study is the need to develop institutions conducive to greater political stability as a means to reduce the reliance on seigniorage financing of public deficits.     

The NIRCU and the Phillips curve: an approach based on micro data

Abstract In this paper we propose a straightforward method to derive a non‐inflationary rate of capacity utilization (NIRCU) based on micro data. We condition the current capacity utilization of firms on their current and planned price adjustments. The non‐inflationary capacity utilization rate is then defined as the rate where a firm feels no price adjustment pressure. One of the main advantages is that this methodology uses structural aspects and does not make it necessary to operate with – often rather arbitrary – statistical filters. We show that our aggregate NIRCU performs remarkably well as an indicator of inflationary pressure in a Phillips curve estimation.     

The Interaction between the Central Bank and a Single Monopoly Union Revisited: Does Greater Monetary Policy Uncertainty Reduce Nominal Wages?

Previous papers modelling the interaction between the central bank and a single monopoly union demonstrated that greater monetary policy uncertainty reduces the union's nominal wage. This paper shows that this result does not hold in general, since it depends on peculiar specifications of the union's objective function. In particular, I show that greater monetary policy uncertainty raises the nominal wage whenever union members tend to be more sensitive to the risk of getting low real wages than to the risk of remaining unemployed. This conclusion appears consistent with the evidence showing that greater monetary authority's transparency reduces average inflation .     

Bayesian estimation of the output gap for a small open economy: The case of Canada

We introduce a novel approach for estimating output gaps for small open economies. Identification is based on a multivariate trend-cycle decomposition in which transitory exchange rate movements are linked to the output gap and inflation. The model is then applied to Canadian data.     

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.     

Firm growth and productivity in Belarus: New empirical evidence from the machine building industry

Using a unique dataset comprising information for (up to) 153 firms in the machine building sector in Belarus, we investigate the determinants of firm growth for an economy where state ownership of enterprises is widespread. We use panel data models based on generalizations of Gibrat’s law, total factor productivity estimates and matching methods to assess the differences in firm growth between private and state-controlled firms. Our results indicate that labor hoarding and soft budget constraints play a particularly important role in explaining differences in performance between these two groups of firms.