Inflation targeting credibility and sovereign risk: evidence from Colombia

This article relates to the literature on sovereign risk in developing countries. In particular, we present empirical evidence to address the effect of inflation targeting credibility on sovereign risk based on the Colombian experience. The findings denote that credibility is an important improvement in the institutional framework to reduce the sovereign risk premium.     

The expected real yield and inflation components of the nominal yield curve

The term structure of real yields and expected inflation are two unobserved components of the nominal yield curve. The primary objectives of this study are to decompose nominal yields into their expected real yield and inflation components and to examine their behaviour using state-space and regime-switching frameworks. The dynamic yield-curve models capture three well-known latent factors – level, slope, and curvature – that accurately aggregate the information for the nominal yields and the expected real and inflation components for all maturities. The nominal yield curve is found to increase slightly with a slope of about 120 basis points, while the real yield curve slopes upward by about 20 basis points, and the expected inflation curve is virtually flat at slightly above 2 per cent. The regime-switching estimations reveal that the nominal yield, real yield and expected inflation curves have shifted down significantly since 1999.     

The (de-)anchoring of inflation expectations: New evidence from the euro area

Well-anchored inflation expectations are a key factor for achieving economic stability. This paper provides new empirical results on the anchoring of long-term inflation expectations in the euro area. In line with earlier evidence, we find that euro area inflation expectations have been anchored until fall 2011. Since then, however, they respond significantly to macroeconomic news. Our results obtained from multiple endogenous break point tests suggest that euro area inflation expectations have remained de-anchored ever since.     

Corruption: what are the effects on government effectiveness? Empirical evidence considering developed and developing countries

This study analyses the impact of corruption on government effectiveness for a sample of 130 countries. The findings suggest that less-corrupt countries have better quality of public service, better quality in the formulation and adoption of policies and greater credibility and government's commitment to such policies. The findings also suggest that the effect of corruption on government effectiveness is higher in developed countries. Moreover, the estimates also reveal that countries with the most indebted governments and with higher inflation rates have less-efficient governments, and an increase in rule of law represents a good strategy to improve government effectiveness. In turn, regarding developing countries, the findings show that countries with more democratic regimes have a higher degree of government effectiveness.     

Inflation and inflation uncertainty in China

The study examines the relationship between inflation and inflation uncertainty in China using Generalized Autoregressive Conditional Heteroscedasticity model. Particularly, this link is investigated in China’s urban and rural sectors, motivated by the substantial urban–rural divide. The results provide strong statistical supportive evidence that higher inflation raises inflation uncertainty. On the other hand, evidence on the effect of inflation uncertainty on inflation is mixed depending on the sample periods and areas examined. The understanding of inflation-uncertainty nexus in China could provide implications to policymakers in the adoption of monetary policies.     

The sacrifice ratio and core inflation

The existing body of research that measures the sacrifice ratio and the determinants of the sacrifice ratio has crucially identified several disinflation episodes across many different countries, while also overwhelmingly finding evidence in favor of the “cold-turkey” approach to disinflation. However all previous studies in this topic are based exclusively on headline measures of inflation. In this paper we investigate what happens if we instead use core inflation to both identify disinflation episodes and measure the sacrifice ratio. Several important differences emerge: for example, headline inflation produces more disinflation episodes than core inflation does – something which is particularly conspicuous during the Great Recession – and episodes that are generally shorter in length. We also find that the argument in favor of the cold-turkey approach to reducing inflation disappears when combining the use of core inflation with sacrifice ratio measures that allow for varying persistent effects on output of disinflation.     

On Targeting Frameworks And Optimal Monetary Policy

We show that speed limit policy, a monetary policy strategy that focuses on stabilizing inflation and the change in the output gap, consistently outperforms flexible inflation targeting and flexible price level targeting in empirical medium‐scale DSGE models under discretionary policymaking. In contrast to small‐scale New Keynesian models, this welfare ranking of the targeting frameworks is not overturned when inflation dynamics are mostly backward‐looking. Importantly, the performance of the speed limit policy shows less sensitivity to its parameterization than other frameworks that target the inflation rate or the price level.     

Forecasting using heterogeneous panels with cross-sectional dependence

In this paper, we focus on forecasting methods that use heterogeneous panels in the presence of cross-sectional dependence in terms of both spatial error dependence and common factors. We propose two main approaches to estimating the factor structure: a residuals-based approach, and an approach that uses a panel of auxiliary variables to extract the factors. Small sample properties of the proposed methods are investigated through Monte Carlo simulations and applied to predict house price inflation in OECD countries.     

Is the unemployment–inflation trade-off still alive in the Euro Area and its member countries? It seems so

The unemployment–inflation trade-off can be interpreted as a proposition concerning the response of these two variables to aggregate demand shocks. In this paper, we study the possible presence of the trade-off in the Euro Area and in a wide group of Euro-area countries in the last 20 years, that is, since the start of EMU. We use the structural VAR methodology that allows the separation between supply and demand shocks. Our main finding is that the existence of a trade-off is largely confirmed both at the Euro Area and at the national level. Nevertheless, the size of the trade-off, measured at different horizons, shows some heterogeneity among countries. No less important, when we augment the VAR model by introducing monetary policy in the context of an open economy, we find that monetary policy shocks push inflation and unemployment in opposite directions in the currency area. Another interesting result concerns the evidence of a relatively flat relation between unemployment and inflation, conditionally to monetary policy shocks. The bulk of these conclusions seem to be confirmed by a number of robustness checks.     

The Role of Inflation Target Adjustment in Stabilization Policy

How and under what circumstances can adjusting the inflation target serve as a stabilization-policy tool and contribute to welfare improvement? We answer these questions quantitatively with a standard New Keynesian model that includes cost-push-type shocks. Our proposed inflation target rule calls for the target to be adjusted in a persistent manner and in the opposite direction to the realization of a cost-push shock, which is essentially a makeup strategy. The inflation target rule, combined with a Taylor-type rule, significantly reduces inflation fluctuations originating from cost-push shocks and mitigates the stabilization trade-off, resulting in a similar level of welfare to that associated with the Ramsey optimal policy.