The role of the financial system in the growth–inflation link: the OECD experience

This paper jointly estimates the effects of financial development and inflation on growth using both cross-section and time-series dimensions of the data on inflation, growth, and some banking and stock market indicators over the period 1961–1993 for a sample of OECD countries. Overall, the results indicate, first, that the long-run costs of inflation are not explained by policies of financial repression and, second, that if inflation affects growth through its interaction with financial market conditions, this is not the only (nor the most important) channel.     

Non-linearities in euro area inflation persistence

This paper investigates the nature of inflation dynamics with a special focus on inflation persistence. Using data from euro area member-states we estimate dynamic non-linear panel models addressing in detail econometric issues concerning unobserved heterogeneity, genuine state dependence, and the initial conditions problem. After controlling for observed and unobserved heterogeneity, our results suggest that the degree of inflation persistence is genuine and varies depending on whether the inflation rate is too high, within the range of ECB's target of price stability, too low or negative. This implies that policies to stabilize inflation in the short run will have longer-run effects.     

Relative Price Changes and Households' Welfare in Italy

The entrance of Italy in the Euro area in 2001 has given rise to a wide debate about the perception of inflation on households' well‐being. However, most of the debate has involved the measurement of the “correct” consumer price index at the national level. Much less analysis has been carried out on the distributional consequences of inflation on every household. The paper addresses this issue by performing a microsimulation analysis of the impact of inflation on Italian households in the period 1997–2007. It is shown that the impact of inflation has an ambiguous path over the period, with a large concentration of welfare losses around the introduction of the Euro currency. In particular, it is found that poorer and larger households are severely hurt by inflation and that the prices of gas and gasoline are largely responsible for determining the living conditions of Italian households.     

On the real effects of inflation and inflation uncertainty in Mexico

We estimate an augmented multivariate GARCH-M model of inflation and output growth for Mexico at business cycle frequencies. The main findings are: (1) inflation uncertainty has a negative and significant effect on growth; (2) once the effect of inflation uncertainty is accounted for, lagged inflation does not have a direct negative effect on output growth; (3) However as predicted by Friedman and Ball, higher average inflation raises inflation uncertainty, and the overall net effect of average inflation on output growth in Mexico is negative. That is, average inflation is harmful to Mexican growth due to its impact on inflation uncertainty. (4) The Mexican Presidential election cycle significantly raises inflation uncertainty both during the year of the election and the year following the election which has correspondingly negative effects on output growth.     

On the determinants of long-run inflation uncertainty: Evidence from a panel of 17 developed economies

Based on a cross section of 17 advanced economies and data for the period 1975 to 2015, we examine how the interaction between monetary policy and macroeconomic conditions affects inflation uncertainty in the long-term. We construct a proxy for the unobservable inflation uncertainty based on the slowly evolving long-term variance component of inflation from a Spline-GARCH model (Engle and Rangel, 2008). We show that long-run inflation uncertainty is high if an inflation-tolerant central bank governor is in power during a period of high inflation, if the policy rate is below the one that is prescribed by the Taylor rule and during times of heightened stock and exchange rate volatility.     

Response to Seitz and Tödter, 'How the P* Model Rationalizes Monetary Targeting: A Comment on Svensson'

Seitz and TÎdter argue, counter to Svensson, that the P * model provides a rationale for money-growth targeting. In particular, they argue that 'money growth targeting is a special form of inflation forecast targeting based on a "limited" information set. In contrast to "full information" inflation forecast targeting, money growth targeting is likely to be more robust under changing conditions of the real world'.
However, money-growth targeting is better described as a special case of inflation targeting, namely when money growth is considered to be the only predictor of future inflation. But there is overwhelming empirical evidence that there are not only other, but also better, predictors of future inflation than money growth, which makes inflation-forecast targeting superior to money-growth targeting. Inflation-forecast targeting is indeed more robust (in the sense of using available information and allowing judgemental adjustments in a flexible way) than monetary targeting.
In particular, in the P * model, the real money gap is a better predictor of future inflation than money growth, as demonstrated theoretically by Svensson and empirically by Gerlach and Svensson (the empirical finding is also confirmed by Trecroci and Vega). Therefore, inflation-forecast targeting is superior also within the P * model. Under `changing conditions of the real world', for instance after the formation of a monetary union, money growth is likely to be particularly unreliable as a predictor of future inflation, making monetary targeting especially unsuitable and non-robust.     

Capital Trading,Stock Trading,and the Inflation Tax on Equity

A market for used capital goods, or financial instruments that represent the ownership of the used capital goods, induces inflation taxes on wealth and on the nominal income flows that they provide. This paper explicitly introduces trading in either used capital goods or financial instruments into the standard stochastic growth model with money and production. These two monetary economies are equivalent. The value of the firm is equal to the firm's capital stock divided by inflation. The resulting asset-pricing conditions indicate that the effect of inflation on asset returns differs from the effects found in the literature by the addition of a significant wealth tax. Journal of Economic Literature Classification Numbers: E0, E4, E5.     

Alternative indicators for predicting the probability of declining inflation: evidence from the US

The performance of inflation indicators for predicting the probabilityof inflation falling inside constant and moving targets is consideredwith a probit model using US data. Given the Federal ReserveSystem's emphasis on achieving price stability, particular attentionis given to the target that future inflation will be below recentinflation. In contrast with earlier years, the unemploymentand capacity utilisation rates do not perform well in forecastingthe direction of inflation in the mid and late 1990s. We suggestthat extending the Keynesian Phillips curve analysis to considerchanges in labour market conditions, technological advance andworker skills, and openness will increase understanding of theseissues.     

Global slack and domestic inflation rates: A structural investigation for G-7 countries

Recent papers have argued that one implication of globalization is that domestic inflation rates may have now become more a function of “global”, rather than domestic, economic conditions, as postulated by closed-economy Phillips curves.This paper aims to assess the empirical importance of global output in determining domestic inflation rates by estimating a structural model for a sample of G-7 economies. The model can capture the potential effects of global output fluctuations on both the aggregate supply and the aggregate demand relations in the economy and it is estimated using full-information Bayesian methods.The empirical results reveal a significant effect of global output on aggregate demand in most countries. Through this channel, global economic conditions can indirectly affect inflation. The results, instead, do not seem to provide evidence in favor of altering domestic Phillips curves to include global slack as an additional driving variable for inflation.     

Inflation, inflation uncertainty, and monetary policy in Turkey: 1960–1998

The authors constructed a time series of monthly inflation uncertainty in Turkey from 1960 to 1998 using GARCH models and investigated the link between inflation and inflation uncertainty using Granger tests. The authors found strong statistical support that inflation significantly raised inflation uncertainty in Turkey over the full sample period and three subsamples. The evidence on the effect of inflation uncertainty on average inflation is mixed and depends on the time period examined. An analysis of the political conditions and the record of macroeconomic policy making in Turkey between 1960 and 1998 reveal institutional and political factors that can help explain the empirical results.     

Structural Changes and the Scope of Inflation Targeting in Korea *

A small, open macroeconomic model that accounts for new financial accelerator effects (the effects of fluctuations in asset prices on bank credit and economic activity) is developed to evaluate various policy rules for inflation targeting. Given the conditions of asset markets and the fragility of the financial sector, monetary policy responses can potentially amplify the financial accelerator effect. Simulations are used to compare various forms of inflation targeting using a model that emphasizes long-term inflation expectations, output changes, and the asset price channels. The simulations suggest that a successful outcome can be obtained by adhering to simple forward-looking rules, rather than backward-looking policy rules. Furthermore, inflation targeting can contribute to price as well as output stability by helping to keep the financial accelerator from being activated. Inflation targeting in emerging economies can provide an environment conducive to long-term capital market development. [E51,F3,F4]     

The negative side of inflation targeting: revisiting inflation uncertainty in the EMU

ABSTRACT

This article tests the Friedman–Ball hypothesis for the European Monetary Union (EMU) countries, using a GARCH methodology. The empirical results show a positive relationship between inflation and inflation uncertainty, largely supportive of the Friedman–Ball hypothesis. Furthermore, the ECB’s price stability mandate is found to have asymmetric, if not limited, effects on inflation uncertainty since 1999, with the findings different for the so-called peripheral countries when compared to the core. For the majority of the EMU countries, shifts away from the 2% target served to increase inflation uncertainty. The credibility of the ECB since the financial crisis, in attempting to meet its 2% inflation target has seen inflation uncertainty increase for some, likely driven by inflation failing to re-anchor. Furthermore, recent periods of deflation are found to generate inflation uncertainty, with short-term price variability increasing in line with observed negative price growth for the majority of the EMU countries. The results are supportive of a U-shaped relationship between inflation and inflation uncertainty. Using spline techniques, we formally provide support for such a U-shaped relation where inflation uncertainty broadly increases below a certain threshold for each country’s inflation rate. Asymmetric effects across countries are found in the level of this threshold.     

我国通货膨胀与货币供给和经济增长的关系研究

基于协整检验和VAR模型选取1984～2010年的年度数据研究了通货膨胀与货币供给和经济增长之间的关系,研究表明:货币供给和经济增长都会导致通货膨胀,但通货膨胀不会引发货币超发,且一定的通货膨胀对经济增长具有正向刺激作用;货币供应量扩张对通货膨胀有促进作用,但影响程度逐步减弱,经济增长也会促使物价水平的上涨,但影响程度明显小于货币供给水平的影响;经济增长对物价水平的影响小于货币供应量对物价水平的影响,即货币供应量诱发通货膨胀,抑制通货膨胀的最好途径是解决货币供给问题;经济系统中存在"通货膨胀螺旋"效应。     

我国通货膨胀率均值过程和波动过程中的双长记忆性度量与统计检验

This paper uses the ARFIMA-FIGARCH model to investigate the China’s monthly inflation rate from January 1983 to October 2005. It is found that both first moment and second moment of inflation have remarkable long memory, indicating the existence of long memory properties in both inflation level and inflation uncertainty. By the Granger-causality test on inflation rate and inflation uncertainty, it is shown that the inflation level affects the inflation uncertainty and so supports Friedman hypothesis. Therefore, as for policy maker, they should roundly concerns on long memory properties of inflation and inflation uncertainty, and their single-direction relationship between them. __________ Translated from Guanli shijie 管理世界 (Management World), 2007, (7): 14–21     

Non-linearities in inflation–growth nexus in the SADC region: A panel smooth transition regression approach

The main objective of central banks around the world is the achievement and maintenance of price stability, which actually creates an environment conducive for faster economic growth. Therefore, it is important for policy makers to understand the relationship between inflation and economic growth in order to make sound policies. If inflation is detrimental to economic growth, then policy makers should aim for low rates of inflation. This leads to a question; how low should the inflation rate be? Previous research in the non-linearities of the inflation–growth relationship has found that a positive relationship exists when the inflation rate is low and a negative relationship when the inflation rate is high. This implies the existence of a threshold level of inflation at which the sign switches. In this paper we use panel data for the period 1980–2008 to examine the inflation–growth nexus in the Southern African Development Community (SADC) region and to endogenously determine the threshold level of inflation. To deal with problems of endogeneity and heterogeneity, the paper uses the Panel Smooth Transition Regression (PSTR) method developed by González et al. (2005) to examine the non-linearities in the inflation–growth nexus. This technique further estimates the smoothness of the transition from a low inflation to a high inflation regime. The findings reveal a threshold level of 18.9%, above which inflation is detrimental to economic growth in the SADC region.     

How the P* Model Rationalizes Monetary Targeting: A Comment on Svensson

In this comment, we answer the question posed in Svensson’s (2000) paper ‘Does the P* Model Provide any Rationale for Monetary Targeting?’– in contrast to him ‐‐ in the affirmative. We argue that a strategy of monetary targeting can be rationalized within the P* framework. Furthermore, we demonstrate that money growth targeting is a special form of inflation forecast targeting based on a ‘limited’ information set. In contrast to ‘full information’ inflation forecast targeting, monetary growth targeting is likely to be more robust under changing conditions of the real world.     

The price stability oriented monetary policy of the ECB: an assessment

The definition of price stability adopted by the ECB has recently been criticized in the literature, particularly for being unable to fully anchor inflation expectations and creating a deflation risk. In the paper empirical evidence is provided against these claims. Despite the unfavourable macroeconomic conditions for the euro area since 2001, monetary policy management has lead to the setting of the policy rate at levels compatible with trend inflation (the long-run inflation forecast) in the range 1–3%, and therefore without affecting negatively the inflation outlook.     

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.     

Estimating inflation compensation for Turkey using yield curves

Inflation compensation derived from nominal and real bond yields contains market based, real time information regarding the inflation expectations and the pricing of inflation risks. In this study, we calculate inflation compensation for Turkey by using nominal and real yield curves. The findings of event study analysis on inflation compensation indicate that changes in the term structure of inflation compensation contain information regarding the credibility of monetary authority. Moreover, we find that, at daily frequency, liquidity conditions have no significant effect on inflation compensation and hence the effects of events such as monetary policy decisions and inflation surprises on inflation compensation can be attributed mainly to changes in inflation expectations and pricing of inflation uncertainty.     

Stock return predictability: the role of inflation and threshold dynamics

This paper argues that the nature of stock return predictability varies with the level of inflation. We contend that the nature of relations between economic variables and returns differs according to the level of inflation, due to different economic risk implications. An increase in low level inflation may signal improving economic conditions and lower expected returns, while the opposite is true with an equal rise in high level inflation. Linear estimation provides contradictory coefficient values, which we argue arises from mixing coefficient values across regimes. We test for and estimate threshold models with inflation and the term structure as the threshold variable. These models reveal a change in either the sign or magnitude of the parameter values across the regimes such that the relation between stock returns and economic variables is not constant. Measures of in-sample fit and a forecast exercise support the threshold models. They produce a higher adjusted R², lower MAE and RMSE and higher trading related measures. These results help explain the lack of consistent empirical evidence in favour of stock return predictability and should be of interest to those engaged in stock market modelling as well as trading and portfolio management.