Quantifying the Risk of Deflation

We propose formal and quantitative measures of the risk that future inflation will be excessively high or low relative to the range preferred by a private sector agent. Unlike alternative measures of risk, our measures are designed to make explicit the dependence of risk measures on the private sector agent's preferences with respect to inflation. We illustrate our methodology by estimating the risks of deflation for the United States, Germany, and Japan for horizons of up to 2 years. The question of how large these risks are has been subject to considerable public debate. We find that, as of September 2002 when this question first arose, there was no evidence of substantial deflation risks for the United States and for Germany, contrary to some conjectures at the time. In contrast, there was evidence of substantial deflation risks in Japan.     

Benchmark Bonds Interactions under Regime Shifts

In the present paper we examine the interactions among five benchmark ten year government bonds, namely those of the USA, Germany, France, Italy and the Netherlands. Our aim is to illustrate empirically a net of interactions existing among the major bond markets of Europe and the US market taking into account shifts in the underlying stochastic processes. For this purpose, differing from the rest of the relevant empirical literature, after specifying the long run equilibrium relations we estimate the linkages between the bond markets as subject to hidden Markov chains, by applying the Markov Switching Vector Error Correction framework (MS‐VECM). This formulation is found to efficiently reflect the shifts brought about by significant economic events, such as the European monetary unification. As a result we illustrate different short‐run relations referring to the periods before and after the monetary union. Overall, our empirical results indicate that stronger interactions among the markets of the system exist in the period after the EMU. Also, by means of a variance decomposition analysis we assess leader‐follower relations which indicate that the benchmark status of bonds has changed since the introduction of the common monetary policy framework in Europe.     

An Empirical Investigation of the Effects of Rounding on the SPF Probabilities of Decline and Output Growth Histograms

I consider the possibility that respondents to the Survey of Professional Forecasters round their probability forecasts of the event that real output will decline in the future, as well as their reported output growth probability distributions. I make various plausible assumptions about respondents’ rounding practices, and show how these impinge upon the apparent mismatch between probability forecasts of a decline in output and the probabilities of this event implied by the annual output growth histograms. I find that rounding accounts for about a quarter of the inconsistent pairs of forecasts.     

Where is the GE? Consumption Dynamics in DSGEs

We offer a partial equilibrium perspective on the behavior of consumption in dynamic stochastic general equilibrium (DSGE) models. We consider a benchmark dynamic general equilibrium model and show that a standard calibration implies that the real interest rate is essentially fixed. One manifestation of this feature is that, with separable preferences, the reaction of consumption to total factor productivity (TFP) shocks is flat: the random‐walk permanent income hypothesis holds almost exactly, pretty much as in a partial equilibrium consumption‐savings problem. These results help explain the prominent role of aggregate demand, and how it is achieved, in modern DSGE analysis.     

Disagreement and Biases in Inflation Expectations

Disagreement in inflation expectations observed from survey data varies systematically over time in a way that reflects the level and variance of current inflation. This paper offers a simple explanation for these facts based on asymmetries in the forecasters' costs of over- and underpredicting inflation. Our model implies (i) biased forecasts, (ii) positive serial correlation in forecast errors, (iii) a cross-sectional dispersion that rises with the level and the variance of the inflation rate, and (iv) predictability of forecast errors at different horizons by means of the spread between the short- and long-term variance of inflation. We find empirically that these patterns are present in inflation forecasts from the Survey of Professional Forecasters. A constant bias component, not explained by asymmetric loss and rational expectations, is required to explain the shift in the sign of the bias observed for a substantial portion of forecasters around 1982.     

EMPTOR AUSTRALIS: THE AUSTRALIAN CONSUMER IN EARLY TWENTIETH CENTURY ADVERTISING LITERATURE

Well aware that it is the consumer who makes or breaks an advertisement, the advertising industry has long paid close attention to its audience. However, advertising historians have generally overlooked the industry's efforts to define the consumer and the impact this has had upon advertisements and the advertising industry itself. By examining the changing conceptualisation of the Australian consumer featured in the locally produced advertising literature during the early twentieth century, this study offers an insight into the inner workings of Australia's fledgling advertising industry. It demonstrates the ways in which advertising interacted with the world around it.     

KEITH WINDSCHUTTLE's CONTRIBUTION TO AUSTRALIAN HISTORY: AN EVALUATION

In two recent books, Keith Windschuttle has reinvigorated debate on two central questions in Australian history: the extent of frontier violence in the colonisation of Australia and the origins of the White Australia Policy. This assessment of Windschuttle's scholarship will focus on how he arrives at his conclusions: his methodology, his use of evidence and the coherence of his arguments. It will draw on the literature of economic history to show how its methods and perspectives can inform these debates in Australian history.     

Quantifying the uncertainty about the fit of a new Keynesian pricing model

Recent studies by Gali and Gertler [1999. Inflation dynamics: a structural econometric analysis, Journal of Monetary Economics 44, 195-222] and Sbordone [2002. Prices and unit labor costs: testing models of pricing, Journal of Monetary Economics 49, 265-292] conclude that a theoretical inflation series implied by a forward-looking New Keynesian pricing equation fits post-1960 U.S. inflation closely. Their theoretical inflation series is conditional on (i) a reduced-form forecasting process for real marginal cost; and (ii) the calibration of the pricing equation. The present paper shows that both of these determinants are surrounded by considerable uncertainty. When quantifying the impact of this uncertainty on theoretical inflation, we can no longer say whether the forward-looking pricing equation explains observed inflation dynamics very well or very poorly.     

Causal relations between inflation and inflation uncertainty—Cross sectional evidence in favour of the Friedman-Ball hypothesis

We test for causality between inflation and its associated uncertainty by means of both in-sample and out-of-sample modelling. Our findings indicate that the impact of inflation on inflation uncertainty is more pronounced than the reverse causal effect.     

How do central banks react to wealth composition and asset prices?

We assess the response of monetary policy to developments in asset markets in the euro area, the US and the UK. We estimate the reaction of monetary policy to wealth composition and asset prices using: (i) a linear framework based on a fully simultaneous system approach in a Bayesian environment; and (ii) a nonlinear specification that relies on a smooth transition regression model.