Showing papers on "Inflation published in 1988"

The Excess Co-Movement of Commodity Prices

Abstract: This paper tests and confirms the existence of a puzzling phenomenon - the prices of largely unrelated raw commodities have a persistent tendency to move together. We show that this comovement of prices is well in excess of anything that can be explained by the common effects of past, current, or expected future values of macroeconomic variables such as inflation, industrial production, interest rates, and exchange rates. These results are a rejection of the standard competitive model of commodity price formation with storage.

Sources of Business Cycle Fluctuations

Abstract: What shocks account for the business cycle frequency and long-run movements of output and prices? This paper addresses this question using the identifying assumption that only supply shocks, such as shocks to technology, oil prices, and labor supply affect output in the long-run Real and monetary aggregate demand shocks can affect output, but only in the short-run This assumption sufficiently restricts the reduced form of key macroeconomic variables to allow estimation of the shocks and their effect on output and price at all frequencies Aggregate demand shocks account for about 20 percent to 30 percent of output fluctuations at business cycle frequencies Technological shocks account for about 1/4 of cyclical fluctuations, and about 1/3 of output's variance at low frequencies Shocks to oil prices are important in explaining episodes in the 1970s and 1980s Shocks that permanently affect labor input account for the balance of fluctuations in output, namely, about half of its variance at all frequencies

"The New Keynesian Economics and the Output-Inflation Trade-off"

Abstract: The purpose of this paper is to provide evidence supporting new Keynesian theories. We point out a simple prediction of Keynesian models that contradicts other leading macroeconomic theories and show that it holds in actual economies. In doing so, we point out a "new phenomenon" that Keynesian theories "render comprehensible." The prediction we that we test concerns the effects of steady inflation. In Keynesian models, nominal shocks have real effects because nominal prices change infrequently. An increase in the average rate of inflation causes firms to adjust prices more frequently to keep up with the rising price level. In turn, more frequent price changes imply that prices adjust more quickly to nominal shocks, and thus that the shocks have smaller real effects. We test this prediction by examining the relation between average inflation and the size of the real effects of nominal shocks both across countries and over time. We measure the effects of nominal shocks by the slope of the short-run Phillips curve.

The Macroeconomic Effects of Fund-Supported Adjustment Programs: An Empirical Assessment

Abstract: This paper reviews the existing evidence on the macroeconomic effects of Fund-supported adjustment programs, and provides new estimates of these effects for 67 developing countries with programs during 1973-86. The empirical analysis indicates that in the short run programs have led to an improvement in the current account, the balance of payments, and inflation, but this was accompanied by a decline in the growth rate. In the longer run the positive effects of programs on the external balance and inflation are strengthened, and the adverse growth effects reduced. These results are more definitive than those from previous studies.

Search, Price Setting and Inflation

Abstract: A model of monopolistic competition in an inflationary environment is developed which embodies optimal sequential search, price dynamics and entry on the part of consumers and firms respectively. Equilibrium price strategies are (S, s); these bounds increase continuously with consumer search costs, and so does price dispersion. Indeed, the whole equilibrium varies smoothly from the competitive (Bertrand) to the monopolistic (Diamond (1971)) end of the spectrum. The latter's paradoxical result is explained as a limiting case where frictions on firms' side of the market (price adjustment costs) but not on buyers' (search costs) tend to zero. A positive relationship between (smooth and perfectly anticipated) inflation and price dispersion or uncertainty is established.

Macroeconomics: Principles and Policy

Abstract: PART I: GETTING ACQUAINTED WITH ECONOMICS. 1. What Is Economics? 2. The Economy: Myth and Reality. 3. The Fundamental Economic Problem: Scarcity and Choice. 4. Supply and Demand: An Initial Look. PART II: THE MACROECONOMY: AGGREGATE SUPPLY AND DEMAND. 5. An Introduction to Macroeconomics. 6. The Goals of Macroeconomic Policy. 7. Economic Growth: Theory and Policy. 8. Aggregate Demand and the Powerful Consumer. 9. Demand-Side Equilibrium: Unemployment or Inflation? 10. Bringing in the Supply Side: Unemployment and Inflation? PART III: FISCAL AND MONETARY POLICY. 11. Managing Aggregate Demand: Fiscal Policy. 12. Money and the Banking System. 13. Monetary Policy: Conventional and Unconventional. 14. The Financial Crisis and the Great Recession. 15. The Debate over Monetary and Fiscal Policy. 16. Budget Deficits in the Short and Long Run. 17. The Trade-Off Between Inflation and Unemployment. PART IV: THE UNITED STATES IN THE WORLD ECONOMY. 18. International Trade and Comparative Advantage. 19. The International Monetary System: Order or Disorder? 20. Exchange Rates and the Macroeconomy. Appendix: Answers to Odd-Numbered Test Yourself Questions. Glossary. Index.

Lessons on Monetary Policy from the 1980's

Abstract: Monetary policy events in the United States during the 1980s have led to important changes in thinking about monetary policy and in the actual conduct of policy.. The central event in this regard has been the collapse of relationships connecting familiar money to both income and prices. The fastest money growth since World War II, maintained for fully half a decade, occurred in conjunction with the greatest post-war reduction in inflation. Inflation predictions based on money growth during this period therefore failed altogether to anticipate what many observers have regarded as the most significant monetary policy success of the post-war period. Predictions based on credit aggregates would have fared no better. Other important changes have resulted from the increased openness of the U.S. economy and the U.S. financial markets. International considerations that previously could have mattered in a policy context, but typically did not, have reached macroeconomically meaningful magnitudes in the 1980s. The sharp decline in U.S. competitiveness, following the rise in dollar exchange rates early in the decade, powerfully affected U.S. nonfinancial economic activity. The borrowing that the United States has done to finance the resulting trade deficit has greatly enhanced the role of foreign investors in U.S. markets. Exchange rates have therefore assumed new importance in the conduct of U.S. monetary policy. Along with exchange rates, short-term interest rates have again emerged as the principal focus of policy. Economic research would probably prove more useful in a policy context if economists turned at least some of the efforts they have devoted to trying to resurrect money-income and money-price relationships to analyzing how to conduct monetary policy without them.

Lessons on Monetary Policy from the 1980s

Abstract: The half-decade running from mid-1982 to mid-1987 was a pretty good era for US monetary policy, as these things go. The recovery that ensued developed into a sustained expansion that continued without interruption through the end of 1987, thereby setting a new record for the longest recorded business expansion in US peacetime experience. In the eyes of many economists, the Federal Reserve System has been steering without a rudder ever since it effectively abandoned its commitment to monetary growth targets in 1982. The immediate motivation underlying this dramatic move was the rapidly deteriorating inflation situation, together with growing concerns about the dollar exchange rate. The effects of the new combination of policy strategy and policy tactics implemented in October 1979 were immediately visible, and they continued to be so for the next several years, although in some aspects they ran counter to the new policy’s declared intent.

Inflation Expectations Revisited

Abstract: This paper describes the construction and main features of a new monthly time series for the mean and standard deviation of consumer inflation expectations in the United Kingdom in the years 1961-85, based on a number of consumer surveys. This involves generalizing to four- and five-category tendency survey data the method used by J. A. Carlson and M. Parkin (1975) to quantify the results of a three-category tendency survey of inflation expectations. The new series exhibit very different time series properties from the original Carlson-Parkin data. Copyright 1988 by The London School of Economics and Political Science.

Financial Liberalization and Economic Development: A Reassessment of Interest-Rate Policies in Asia and Latin America

Abstract: When governments tax and otherwise distort their domestic capital markets, the economy is said to be financially 'repressed'.2 Usury restrictions oninter est rates, heavy reserve requirements on bank de posits, and compulsory credit allocations interact with ongoing price inflation to reduce the attrac tiveness of holding claims on the domestic banking system. In such a repressed financial system, real depositrates ofinterestonmonetary assets areoften negative, and are difficult to predict when inflation is high and unstable. Thus, the demand for money—broadly defined to include savings and term deposits as well as checking accounts and currency—falls as a proportion of GNP.

The Unemployment Rate Consequences of Partisan Monetary Policies

Abstract: Economists and political scientists have identified several ways in which political motivations and institutional arrangements can affect macroeconomic policymaking. One way is described by the political business cycle model [42; 37], in which vote-seeking politicians manipulate the path of the economy to secure unsustainably "favorable" conditions at election times. Variants of this model have been widely tested, with limited success.' A second channel for political impacts comes through partisan policy changes brought about by electoral turnover. The pathbreaking work in this literature includes the contributions of Hibbs [30; 31; 32; 33] and Beck [11]. These works have focused on the empirical issue of how unemployment rates vary under Democratic and Republican presidents in the U.S., and have found strong support for the proposition that unemployment rates decline under Democratic administrations. A third phenomenon has been studied primarily by economists, and concerns the credibility problem faced by a central bank selecting money growth rates. Models of the credibility problem [8; 21] describe a setting in which the central bank and the public interact by respectively choosing actual and expected money growth rates. In a variant of the prisoners' dilemma, this interaction can result in excessive inflation.

Black market premia, exchange rate unification, and inflation in Sub-Saharan Africa

Abstract: World Bank and International Monetary Fund (IMF) programs favor unification of official and black market exchange rates on the argument that multiple exchange rates misallocate resources. This article shows that such policy advice sometimes overlooks an important consideration : when multiple rates are a means of taxation, the widened deficit from unification increases inflation. This article uses the experience of Ghana, Nigeria, and Sierra Leone to illustrate the tradeoff between the benefits of unification for resource allocation and its cost for inflation.

Interest Rates and the Subjective Probability Distribution of Inflation Forecasts

Abstract: The interst rate effects of the first four moments of the subjective probability distribution of inflation forecasts from the ASA-NBER survey are examined over the period 1968:4-1985:4 Using Tre asury bill yields as the nominal rate variable in the context of a re duced form Fisher equation, the authors find that inflation uncertain ty, as measured by the average variance of the probability distributi ons of inflation forecasts, to be insignificant However, the average skewness and kurtosis variables which result from these probability distributions do significantly affect interest rates They interpret these effects as accounting for the level of risk or uncertainty abou t future inflation Copyright 1988 by Ohio State University Press

Credibility, Debt and Unemployment: Ireland's Failed Stabilization

Abstract: Can the credibility of a stabilization plan affect the output costs of disinflation? The new classical economics has asserted this possibility, but little evidence has been brought forward. This paper analyzes the stabilization program of Ireland in the l980s against the background of the new classical economics, The main questions are two: Did EMS membership yield a special credibility bonus? And is the stabilization program sustainable. The answer to both questions is negative. The idea of a credibility bonus Is an attractive potential policy implication of EMS membership: by joining the EMS, playing by the rules of fixed exchange rates and benefiting from the stabilizing influence of German inflation targets, a country's policy makers achieve a dramatic turn around in expectations, in inflation and in long-term interest rates. But the evidence on international disinflation in the 1980s shows that it was not limited to EMS members; all OECD countries experienced sharply reduced inflation and a large drop in long-term nominal interest rates, EMS membership did not contribute to reduce the sacrifice ratio of disinflation. In fact Germany, on whose anti-inflation credentials the credibility effects are supposedly based has one of the highest sacrifice ratios among DECD countries. Ireland did reduce inflation to the German level, but a serious public debt problem has emerged and the unemployment rate stands near 20 percent. This raises questions of the Sargent-Wallace kind about the sustainability of the program.

Inflationary Rigidities and Orthodox Stabilization Policies: Lessons from Latin America

Abstract: Orthodox stabilization programs in Latin American countries have been notoriously unsuccessful in combating inflation, despite the imposition of stringent cuts in government deficits. In most cases inflation came down only slowly and temporarily, with concomitant declines in growth and employment. The Bolivian program, one of the only Latin American successes, is contrasted with those of Argentina, Brazil, Chile, and Mexico. The problems of dealing with chronic inflation are compared with those of hyperinflationary countries, and the influence of price and wage rigidities, expectations, and credibility is explored. The study shows that fiscal restraint is a necessary but not sufficient condition for success, and that sound management of nominal variables (the exchange rate and money supply) are also necessary. The critical role of credibility is linked with price and wage rigidities in the chronic inflation countries, whereas the unsuitability of hyperinflation is seen to increase the credibility of and thus the potential for successful stabilization programs.

Monetary Policy Signaling from the Administration to the Federal Reserve

Abstract: This Chapter employs the index of monetary policy signaling from the Administration to the Federal Reserve (SAFER) that was developed in Chapter Two. The SAFER index is a simple weekly sum of articles that appeared in the Wall Street Journal in which Administration officials expressed a desire for easier (+1) or tighter (−1) monetary policy. A key assumption is that systematically over time the financial media capture the essence of communication that is going on between the executive branch and Federal Reserve officials.1 The signaling index is employed in ordinary least squares regressions for the period from January 1964 to November 1991. Cumulative values of the SAFER index over a three-week period, as an explanatory variable, are found to have a statistically significant effect on the average Federal funds rate during the third week, as the dependent variable. Further evidence suggests that the SAFER index is Granger-causal with respect to the Federal funds rate. After classifying the signals by sources within the Administration (Oval Office, Council of Economic Advisers, Treasury and other and unidentified sources), it is shown that, for the overall 1964–1991 period, signals from the Treasury Department and from other and unidentified sources have a statistically significant effect on the Federal funds rate while signals from the Oval Office and the Council do not. When the data are segmented according to who was the Chairman of the Federal Reserve Board at the time ordinary least squares results indicate that the Federal Reserve did not systematically respond to executive branch signaling in a statistically significant way when William McChesney Martin, G. William Miller, and Alan Greenspan were Chairmen but did respond statistically significantly to Administration signaling during portions of the periods during which Arthur Burns and Paul Volcker were Chairmen.

Commodity Prices as a Leading Indicator of Inflation

Abstract: Commodity prices may be a leading indicator of inflation, because of the relative importance of flexible auction markets for the determination of these prices. Empirical tests using data for the large industrial countries as a group suggest that changes in commodity prices tend to lead those in consumer prices, and that the inclusion of commodity prices significantly improves the fit of regressions of a multi-country consumer price index. However, there does not appear to be a reliable long-run relationship between the level of commodity prices and the level of consumer prices.

Monetary Policy Lessons of Recent Inflation and Disinflation

Abstract: By 1975, most economists agreed that the money demand function in the United States was reasonably stable and could serve as a reliable basis for the formulation of monetary policy. Those suspicious of monetarism were on the defensive in the light of the apparently inexorable increase of M1 velocity of about three percent per year with deviations of only a few tenths of a percent. Experience with rising money growth and rising inflation through 1980 only confirmed monetarist views. As Figure 1 shows, all this had changed by 1986. With disinflation in the 1980s, M1 velocity departed convincingly from its 1953–79 trend. The money demand function seems to have fallen apart and is apparently not a reliable basis for monetary policy after all. Consequently, the first major section following this introduction is devoted to the decline of velocity after 1981 and the demise of the "standard" money demand function. Some authors, including (I believe) Benjamin Friedman, conclude that this evidence leaves us so uncertain about the nature of money demand that policymakers cannot rely at all on any presumed money demand regularities. In contrast, my working hypothesis is that the money demand continues to be a stable function of relatively few variables, but that the interest elasticity of money demand is substantially higher than previously thought. (Others have sought money demand explanations in terms of regime shifts, but that literature will not be discussed here.) Events have not been kind to Keynesian monetary policy positions either. Keynesians tend to concentrate on interest rates—especially real interest rates—as the best guide to the effects of monetary policy on the economy. The real rate is discussed

Comparative Properties of Models of the Uk Economy

Abstract: This article analyses the properties of five leading macroeconometric models of the UK economy, in the light of the current discussion of monetary and fiscal policy-making. In simulation experiments, the interest rate and the basic rate of income tax are used to target the inflation rate and to ensure fiscal solvency. Our results show that monetary shocks soon affect the response of quantity variables, and fiscal shocks have monetary consequences, thus the operation of monetary and fiscal policy cannot be separated. Although the Bank of England's view is that it takes two years for monetary policy to have its maximum effect on inflation, our results show that this depends on the approach taken to the modelling of expectations.

Is Money Irrelevant

Abstract: ANY economists recently have been claiming that money has little or no effect on inflation and economic activity. For example, Lyle E. GramIcy, past governor of the Federal Reserve Board, has been quoted as saying the relationship between growth of the economy and the growth of the morley supply is just no longer there.” Meanwhile, even a noted monetarist such as Beiyl W. Sprinkel, the current chairman of the Council of Economic Advisers, says: “It’s a problem. Nobody knows where we ai’e going.”

Black markets for foreign exchange, real exchange rates, and inflation : overnight versus gradual reform in sub-Saharan Africa

Abstract: The black market foreign exchange premium is an important implicit tax on exports, creating a conflict between the fiscal goal of financing government spending with a limited menu of tax instruments and the allocative goal of stimulating exports. In this paper, the premium is solved for in a model that includes the portfolio balance approach to exchange rates, dual exchange markets, and seignorage for financing the fiscal deficit. The steady state and dynamic implications for inflation of floats as a vehicle for unifying official and black market rates are then analyzed. Inflation could rise substantially in the new steady state as the lost revenue from exports is replaced with a higher tax on money. Further, the conditions under which undershooting or overshooting occur are parameterized. The paper is motivated by and illustrated with recent examples from sub - Saharan Africa.

Bolivia's Economic Crisis

Abstract: "This paper is a summary of a monograph on "Bolivian economic performance and foreign debt"

Exchange Rates and Inflation

Abstract: Rudiger Dornbusch's articles on exchange rates and open economy macroeconomics are among the most frequently cited in the field of international economics. Collected for the first time in Exchange Rates and Inflation, these articles, written over the past fifteen years, cover a wide range of issues while providing unique insights into the research style of a major economist. During this period the economics profession has shifted from global monetarism to the new classical economics, and Dornbusch's own interests, and some of his beliefs, have changed as well.Twenty two articles are gathered in four parts: Exchange Rate Theory; Special Topics in Exchange Rate Economics; Equilibrium Real Exchange Rates, and Inflation and Stabilization. Each part includes an introduction that discusses the essays and places them in context.Rudiger Dornbusch is Ford International Professor of Economics at MIT

Property returns and inflation

Abstract: Summary This study investigates the hedging characteristics of property investments. We follow the methodology established in the finance literature by distinguishing between expected and unexpected inflation. The results provide support for the view that property provides a partial hedge against inflation.