On Keynes on inflation and unemployment

Keynes tends to be represented as someone who thought that alleviating unemployment was more important than any other consideration. Interestingly it seems that this was not always the case; he did not recommend employment creation under all conditions of excess labour supply. The great inflation of World War I and its aftermath left an indelible impression on him, and this mitigated his position on the importance of high levels of employment. In 1920 he recommended that inflation in the UK be controlled even if some unemployment would result, and there is at least some hint in his work that the relative importance to him of inflation and unemployment did not vary much over the remainder of his life.     

The effects of oil price shocks on inflation in the G7 countries

This study examines the effects of three types of oil price shocks on inflation in the G7 countries with a new method of isolating oil price shocks. Based on monthly data from January 1997 to January 2019, we find that each oil price shock has the largest effect on U.S. inflation among the G7 countries and each country’s response to oil price shocks is different. Moreover, a rolling-window analysis shows that supply shocks, demand shocks and risk shocks have dynamic effects on inflation. The effect of supply shocks on inflation is strong before the financial crisis, but weakens during the crisis. However, the effect of demand shocks increases sharply in this time. The effect of risk shocks mainly occurs during the financial crisis and the European debt crisis. In addition, this study uses two ways to verify the robustness of the results. Our empirical results have important implications for policymakers and manufacturers, since the results provide a good explanation for the response of inflation in the G7 countries to the oil price shocks from different sources.     

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 impact of macroeconomic factors on income inequality: Evidence from the BRICS

In this paper we investigate how the evolution of income growth, real interest rates, and inflation have driven income inequality across a variety of countries with particular focus on the BRICS economies (Brazil, Russia, India, China, and South Africa) during the period 2001 to 2015. Our work suggests that, when central banks of the BRICS economies use monetary policy for macroeconomic stabilization, they need to consider the impact monetary policy changes have on the distribution of income in their nations. Our estimates reveal that the unintended consequence of policies that induce economic growth and higher prices is higher income inequality. We find that the positive relationship between the three macroeconomic variables and income inequality for the BRICS economies is stronger during the post-2008 period.     

The impact of the COVID-19 pandemic on business expectations

We document and evaluate how businesses are reacting to the COVID-19 crisis through August 2020. First, on net, firms see the shock (thus far) largely as a demand rather than supply shock. A greater share of firms report significant or severe disruptions to sales activity than to supply chains. We compare these measures of disruption to their expected changes in selling prices and find that, even for firms that report supply chain disruptions, they expect to lower near-term selling prices on average. We also show that firms are engaging in wage cuts and expect to trim wages further before the end of 2020. These cuts stem from firms that have been disproportionally negatively impacted by the pandemic. Second, firms (like professional forecasters) have responded to the COVID-19 pandemic by lowering their one-year-ahead inflation expectations. These responses stand in stark contrast to that of household inflation expectations (as measured by the University of Michigan or the New York Fed). Indeed, firms’ one-year-ahead inflation expectations fell precipitously (to a series low) following the onset of the pandemic, while household measures of inflation expectations jumped markedly. Third, despite the dramatic decline in firms’ near-term inflation expectations, their longer-run inflation expectations have remained relatively stable.     

Do currency undervaluations affect the impact of inflation on growth?

In this paper, we investigate how the level of currency undervaluations affects the effect of inflation on growth in a sample of 62 countries over the 1980–2015 period. While previous studies find a positive effect of an undervalued currency, we show that higher currency undervaluations reinforce the contractionary effect of inflation on growth. As an undervalued currency is associated with supplementary inflation pressures arising from a cost-push inflation phenomenon and economy overheating, growth is thus penalized. This result is shown to be robust to the exclusion of currency crises episodes from our sample, and dependent of the development level of countries. Specifically, it holds in the case of emerging countries, but not for developing economies. Consequently, policies based on undervaluations should not be encouraged for emerging economies as they tend to reinforce the contractionary effect of inflation on growth.     

The long-run Phillips curve: A structural VAR investigation

Both cointegration methods, and non-cointegrated structural VARs identified based on either long-run restrictions, or a combination of long-run and sign restrictions, are used in order to explore the long-run trade-off between inflation and the unemployment rate in the post-WWII U.S., U.K., Euro area, Canada, and Australia. Overall, neither approach produces clear evidence of a non-vertical trade-off. The extent of uncertainty surrounding the estimates is however substantial, thus implying that a researcher holding alternative priors about what a reasonable slope of the long-run trade-off might be will likely not see her views falsified.     

Does the spatial representation affect criteria weights in environmental decision-making? Insights from a behavioral experiment

The need and interest to consider cognitive and motivational biases has been recognized in different disciplines (e.g. economics, decision theory, risk analysis) and has recently reached environmental decision-making. Within this domain, the intrinsic presence of a spatial dimension of both alternatives and criteria calls for the use of maps throughout the decision-making process to properly represent the spatial distribution of the features under analysis. This makes spatial Multi Criteria Decision Analysis (MCDA) a particularly interesting domain to explore new dimensions of cognitive biases. This study proposes a behavioral experiment aimed at discovering to what extent the spatial visualization (i.e. maps) of criteria versus the non-spatial one (i.e. tables) can bias the weight elicitation phase of a spatial MCDA process. The experiment simulates a very common analysis in environmental and land use planning: land suitability analysis. Our findings show that there are significant consequences on how important we perceive a certain criterion to be, depending on whether it is represented as a map or as a table among a mix of maps and tables. Indeed, the map representation of the same criterion leads to higher weights attributed to that criterion compared to the table representation. Visualizing the same information as a map or as a table, although technically equivalent, is thus not psychologically equivalent for Decision Makers. The results of this experiment are expected to have implications for spatial decision-making processes, by generating better awareness on the impacts of map-mediated land suitability analysis.     

Forecasting and forecast narratives: The Bank of England Inflation Reports

We analyze the narratives that accompany the numerical forecasts in the Bank of England’s Quarterly Inflation Reports, 1997–2018. We focus on whether the narratives contain useful information about the future course of key macro variables over and above the point predictions, in terms of whether the narratives can be used to enhance the accuracy of the numerical forecasts. We also consider whether the narratives are able to predict future changes in the numerical forecasts. We find that a measure of sentiment derived from the narratives can predict the errors in the numerical forecasts of output growth, but not of inflation. We find no evidence that past changes in sentiment predict subsequent changes in the point forecasts of output growth or of inflation, but do find that the adjustments to the numerical output growth forecasts have a systematic element.     

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.