The Challenges of Inflation in Europe and the US

Inflationary pressures and uncertainties related to the severity and duration of the coronavirus pandemic have been growing steadily in the last year. Different approaches to supporting labour force participation in Europe and the United States have led to different inflationary outcomes. In addition, the Russian war against Ukraine, which began on 24 February, has provided a definitive answer to questions about whether rising inflation is just temporary. The sharp increase in already volatile food and energy prices is presenting monetary policymakers with new challenges. The authors in this Forum consider how to respond to rising inflation, discuss why inflation is so hard to predict and examine whether long-term inflation expectations have de-anchored.

     

Determinants of Inflation Expectations in the Euro Area

Euro area inflation has been rising strongly in the wake of the COVID-19 pandemic, giving rise to concerns that there could be second-round effects, with higher inflation leading to higher inflation expectations, which in turn lead to higher inflation. This could result in more persistent rises in inflation.

     

Why Did (Almost) No One See the Inflation Coming?

To understand the possible trajectory of inflation in 2022 and beyond, it is helpful to understand why the United States and Europe had so much inflation in 2021.

     

The ECB’s New Monetary Policy Strategy

The ECB updated its monetary policy strategy for the first time in 18 years in July 2021. Therein, the ECB announced that it is willing to accept a transitory period of moderate inflation overshoot in its efforts to push inflation upwards after a long period of undershooting its target. This study explores whether such an overshoot can be economically justified employing a simple Phillips curve model. The results point to the conclusion that the average inflation rate over the business cycle consolidated about one percentage point below the ECB’s target rate. A temporary asymmetry of the ECB’s monetary strategy seems therefore justified to realign inflation and inflation expectations with the target rate.

     

The Inflation Surge of 2021–22: Scarcity of Goods and Commodities,Strong Labor Markets and Anchored Inflation Expectations

The key to understanding the series of supply shocks that have hit inflation is the nature of the COVID-19 recession.

     

Dollarization,Inflation Targeting,and Inflationary Dynamics in Ghana

ABSTRACT

The impact of dollarization on domestic economic performance, and the welfare implications of high inflation in an inflation targeting environment, have remained a matter of much concern for policymakers in recent years. This study investigates the effects of dollarization on inflation and inflation uncertainty in Ghana for the period January 1990 to December 2017. We apply the exponential Generalized Autoregressive Conditional Heteroskedasticity model together with impulse response and Granger causality tests to explore how dollarization affects the behavior of inflation for the pre-inflation targeting period (January 1990 – May 2007) and post-inflation targeting period (June 2007 – December 2017). The results indicate that dollarization has not played a significant role in the volatility of inflation in Ghana. Also, inflation Granger causes dollarization in both the pre- and post-inflation targeting regimes. Finally, there is a bidirectional causal relationship between inflation and inflation uncertainty following the adoption of inflation targeting monetary policy. We conclude that, although inflation targeting has not presented a significant impact on inflation volatility, it has affected the relationship between inflation and inflation uncertainty in Ghana. The dynamics of inflation volatility and asymmetries present crucial implications which are discussed to guide policymaking.     

A capital-budgeting decision—The case of a multinational corporation operating in high-inflation countries

The situation considered is one in which a parent company based in the United States is making capital-budgeting decisions for a subsidiary operating in a high- inflation country. A numerical example of a lease vs. borrow problem is used to demonstrate the difficulties that are introduced in applying the standard solution to the problem in such a situation. It is shown that because of the existing tax code, inflation affects both the cash flow of a project and the discount rate. Thus, a correct analysis should consider all factors affected by inflation in order to reach the right decision.     

Index of Perceived Inflation or EU Consumer Surveys?

After the euro changeover at the beginning of 2002, a marked discrepancy emerged between perceived inflation and inflation as measured by the consumer price index. To what extent are consumers still overestimating price developments even now? How reliably is this phenomenon measured by the “Index of perceived inflation” developed by Professor Brachinger? What are the findings of the consumer surveys conducted on behalf of the European Commission?

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This article represents the personal opinions of the authors and does not necessarily reflect the views of the Deutsche Bundesbank.     

Remittances and FDI Effects on Economic Growth: A VECM and GIRFs for the Case of Albania

ABSTRACT

This paper analyzes the effects of remittances and foreign direct investments (FDI) on economic growth, gross fixed capital formation (GFCF), and inflation in Albania through a vector error correction model. The results show that remittances Granger-cause positively economic growth short- and long-run and negatively inflation, while no significant relationship has been established between remittances and GFCF. The findings support that remittances, apart from affecting economic growth, disinflate the Albanian economy. With respect to FDI, there are signs that inflation Granger-causes negatively FDI, while there appears to be no relationship between FDI, economic growth, and capital formation.     

The Interrelationship Between Macroeconomic Variables and Stock Prices-The Case of China

ABSTRACT

Prior studies of industrialized countries have found that a definite relationship exists between the stock market returns and macroeconomic variables such as inflation and real output. This paper investigates the effects of changes in the consumer price index on industrial production and stock market returns for China. Six different types of Chinese shares are examined for the period 1994–1998. The results show a very significant positive relationship between inflation and real output. A positive and significant association is found between stock returns and real output in current periods. Inflation seems to have no impact on Chinese real stock returns. These relationships all hold for “B” shares, “H” shares and red chips. China's “A” share returns seem not to be impacted by either changes in domestic inflation or real industrial production.     

MARKETS FOR INFLATION‐INDEXED BONDS AS MECHANISMS FOR EFFICIENT MONETARY POLICY

We consider a continuous‐time framework featuring a central bank, private agents, and a financial market. The central bank's objective is to maximize a functional, which measures the classical trade‐off between output and inflation over time plus income from the sales of inflation‐indexed bonds minus payments for the liabilities that the inflation‐indexed bonds produce at maturity. Private agents are assumed to have adaptive expectations. The financial market is modeled in continuous‐time Black–Scholes–Merton style and financial agents are averse against inflation risk, attaching an inflation risk premium to nominal bonds. Following this route, we explain demand for inflation‐indexed securities on the financial market from a no‐arbitrage assumption and derive pricing formulas for inflation‐linked bonds and calls, which lead to a supply‐demand equilibrium. Furthermore, we study the consequences that the sales of inflation‐indexed securities have on the observed inflation rate and price level. Similar to the study of Walsh, we find that the inflationary bias is significantly reduced, and hence that markets for inflation‐indexed bonds provide a mechanism to reduce inflationary bias and increase central bank's credibility.     

The Colombian Stock Market: 1930-1998

Abstract

This article studies the behavior of the stock market in Colombia with the information given by the Bolsa de Bogota Index (Indice de la Bolsa de Bogota, IBB). The index is analyzed from January, 1930 to December, 1998. The inflation rate covers the same period; the inflation rate as measured by the Consumer Price Index. The results of this analysis show that monthly and per annum return-nominal and real-are well below from the expected return of any financial investor. A first hypothesis to explain this is that the investor and entrepreneurs receive benefits that are non-measurable in terms of economic return. Also it can be said that inflation is negative to the return at the stock market, thus: the larger the inflation rate, the smaller the real return. It is shown that the market does not anticipate the future inflation, and of course it is not included in the actual price. Probabilities for selected real return values are presented. The probability to obtain a real return greater than 0% and other values (5%, 10%, 12% and 18%) as well, is much less than 50%. This might show that investing at the stock market is just gambling.     

Money,Inflation and Output in Nigeria and South Africa: Could Friedman and Schwartz Be Right?

ABSTRACT

This study examines the non-linear relationship between money, inflation and output with respect to the Friedman and Schwartz hypotheses that monetary policy affects prices in the long-run but not in the short-run, and influences output in the short-run but not in the long-run. The study examines the case of Nigeria and South Africa for the period 1970–2016 using the ARDL approach. The study proved that Friedman and Schwartz were right that money growth influences output in the short-run and not in the long-run. This suggests monetary policy is neutral in the long-run; however, the findings of this study cast some doubts on their popular view that money growth affect prices in the long-run but not in the short-run. This study shows that money growth actually affects prices both in the short and long-run. Thus, it is only the long-run dimension of the second hypothesis that is valid; the short-run view of the hypothesis is invalid for both Nigeria and South Africa. In fact, the significant estimates of money growth on inflation in both countries prove that inflation is everywhere a monetary phenomenon (both in the short and long run).     

The Changing Dynamics of Inflation

Inflation in the United States and elsewhere has become lower and more stable over the past two decades. It is likely that monetary policy has played an important role in this change in inflation dynamics by creating expectations of stability. This paper traces the evolution of the role of expectations in thinking about inflation, the supporting evidence over the past two decades, and role of central banks in influencing expectations. Increased global integration has magnified these effects. However, the importance of factors other than monetary policy implies that policymakers must consider a wide range of information before acting. Moreover, expectations of inflation stability cannot be taken for granted; and policymakers must be vigilant against complacency. JEL Classification E31, E58     

Total factor productivity and macroeconomic instability

Total factor productivity (TFP) is an important component of growth for most countries. This article assesses the role of macroeconomic instability on TFP growth. We consider volatility in inflation, openness of an economy and financial market deepness as measures of macroeconomic instability. Empirical evidence provided from Turkey suggests that volatility of openness and financial market deepness reduce TFP growth, whereas volatility of inflation increases TFP growth.     

我国股票市场费雪效应的误差修正模型检验

持有股票是否能够预防通货膨胀,这要依赖于股票市场是否存在费雪效应。目前,研究费雪效应的文献一般将股票市场作为一个整体来看待,主要考虑时间因素和通货膨胀本身的特点对费雪效应的影响。除了考虑时间和通货膨胀因素外,本文还按照金融资本和总资本比率的高低来选择不同的行业作为研究对象,旨在研究费雪效应与股票所在的行业之间的关系。经研究,本文得出费雪效应与股票行业存在显著的联系,即费雪效应一般只存在于金融资本比率不太高的行业。     

Perceived Purposes of Budgets in Organizations in a Developing Country

ABSTRACT

The main objective of this paper is to explore the perceptions which Ghanaian managers have of the purposes which budgets serve in organizations. The paper draws upon previous research concerning the link between budgets and decision-making in the developing world. The findings of these studies suggest that budgets are minimally used and inadequately understood. The data employed in this paper is of a qualitative nature drawn from four large-scale organizations by way of discussions, semi-structured interviews plus documentary evidence. The paradox of the findings is that whilst most managers perceived the major roles of budgets to be planning and control, in fact, budgets are largely ignored. Among the reasons stated for this include the high inflation in the country, lack of money in the organizations, managers' lack of adequate accounting knowledge, and untimely and inappropriate presentation of budget variance reports. The paper concludes with some consideration of the ways in which

the budget can be a more effective management tool.     

Can a Higher Inflation Target Reduce Inflation Volatility?

This paper investigates the relationship between inflation and inflation volatility. Using monthly data from 1913 to 2013, the results show that U.S. inflation and its volatility have been positively correlated when inflation exceeds a certain value, but negatively correlated when inflation is below this threshold. The evidence also suggests that inflation volatility is minimized between annual inflation rates of 1 and 3.6%, which includes both the 2% inflation target of many central banks, and the 3.5% break point predicted by the New Keynesian model of Coibion et al. ( 2012 ), but not the 4% inflation target recommended by Ball ( 2013 ) and Krugman ( 2013 ).     

Safety in the making: Australian product safety for the year 2020

Abstract

This paper is a summary of a report prepared by the author for the Australian Consumers Council that advises the Australian Minister for Consumer Affairs. The purpose is to consider the state of play in product safety management around the world and to suggest a strategy which Australia might implement considering international developments. The inter-nationalisation of product safety matters, the creation of global markets and the harmonisation of standards are key factors which must be taken into account when developing a product safety management system.

A small country like Australia will need to develop effective ways of interacting with the researchers and policy makers of the world to avoid duplication of effort and to contribute to international standards and policies. In the short term the following key recommendations are made:

? the establishment of a Consumer Safety Institute with a research and development role but no enforcement role,

? a review of the technical merit, currency, coverage and mechanisms for development of standards relating to product safety,

? routine reporting of product safety complaints and actions taken by manufacturers,

? the development of efficient mechanisms for assessing the safety of imports into Australia and

? an active strategy for managing and participating in international responsibilities related to product safety.     

Untangling government,market, and investment failure during the Nigerian oil boom: the Cement Armada scandal 1974–1980

Abstract

The ‘Cement Armada’ was a major Nigerian government scandal which culminated in hundreds of cement-laden ships arriving en masse at Lagos, creating severe multi-year-long port congestion during the height of the 1970s oil boom. In spite of the scale of the scandal, its causes and consequences have received little attention from scholars. This article presents new research which suggests the Armada was one of several contributing factors to the extraordinary inflation in the price of construction during period. It places the scandal in the context of debates about corruption, organisational failure and a ‘resource curse’ in Nigeria.