Showing papers on "Inflation published in 1993"

Hybrid Inflation

Abstract: Usually inflation ends either by a slow rolling of the inflaton field, which gradually becomes faster and faster, or by a first-order phase transition We describe a model where inflation ends in a different way, due to a very rapid rolling (`waterfall') of a scalar field $\sigma$ triggered by another scalar field $\phi$ This model looks as a hybrid of chaotic inflation and the usual theory with spontaneous symmetry breaking Another hybrid model to be discussed here uses some building blocks from extended inflation (Brans-Dicke theory), from new inflation (phase transition due to a non-minimal coupling of the inflaton field to gravity) and from chaotic inflation (the possibility of inflation beginning at large as well as at small $\sigma$) In the simplest version of this scenario inflation ends up by slow rolling, thus avoiding the big-bubble problem of extended inflation

What Moves the Stock and Bond Markets? A Variance Decomposition for Long‐Term Asset Returns

Abstract: This paper uses a vector autoregressive model to decompose excess stock and 10-year bond returns into changes in expectations of future stock dividends, inflation, short-term real interest rates, and excess stock and bond returns. In monthly postwar U.S. data, stock and bond returns are driven largely by news about future excess stock returns and inflation, respectively. Real interest rates have little impact on returns, although they do affect the short-term nominal interest rate and the slope of the term structure. These findings help to explain the low correlation between excess stock and bond returns.

Investments, Holdup, and the Form of Market Contracts.

Abstract: The authors analyze incomplete contracts to induce efficient investment. With exogenous switching costs, fixed-price contracts are efficient, generate some rigidity in prices, are renegotiated intermittently by possibly small amounts, and when inflation is positive, generate asymmetric responses to shocks, all consistent with evidence on prices and wages. With two-sided specific investments, efficiency requires prices to have sufficient escalator clauses to avoid renegotiation, as observed in many long-term contracts. A third case, with one-sided specific investments, can generate 'take or pay' contracts and explain why firms sometimes pay for specific investments that appear to benefit employees directly.

Inflation Regimes and the Sources of Inflation Uncertainty

Abstract: This paper develops new time series measures of inflation uncertainty in the United States in the postwar period that account for the prospect of changing inflation regimes. The measures are constructed from estimates of a Markov switching model for inflation. Importantly, we show that rational forecasts derived from the Markov model are consistent with survey measures of inflation expectations. Our Markov model allows us to decompose uncertainty about future inflation into two components; a certainty equivalent component that ignores uncertainty about future inflation regimes, and a regime uncertainty component that reflects this uncertainty. Survey measures of inflation uncertainty, based on the dispersion of forecasts, appear more closely associated to the regime uncertainty component than the certainty equivalent component of inflation uncertainty. The regime uncertainty component also appears to have significant explanatory power in forecasting unemployment while the certainty equivalent component does not. Copyright 1993 by Ohio State University Press.

Macroeconomics in the Global Economy

Abstract: Part 1 Introduction: basic concepts in macroeconomics output determination - introducing aggregate supply and aggregate demand. Part 2 Intertemporal economics: consumption and saving investment saving, investment and the current account the government sector. Part 3 Monetary economics: money demand the money supply process money, exchange rates and prices inflation - fiscal and monetary aspects. Part 4 Output determination, stabilization policy and growth: macroeconomic policies and output determination in the closed economy macroeconomic policies in the open economy - the case of fixed exchange rates, the case of flexible exchange rates inflation and unemployment institutional determinants of wages and unemployment explaining business cycles long-term growth. Part 5 Special topics in macroeconomics: the theory and practice of economic policy financial markets tradeable and non-tradeable goods the developing country debt crisis stopping high inflations.

A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform

Abstract: At the close of the Second World War, when industrialized nations faced serious trade and financial imbalances, delegates from forty-four countries met in Bretton Woods, New Hampshire, in order to reconstruct the international monetary system. Over the next 25 years, with currencies fixed to the American dollar, world trade expanded vigorously, inflation remained moderate, and national income in industrialized countries rose faster than during any other period. In this volume, three generations of scholars and policy makers, some of whom participated in the 1944 conference, consider how the Bretton Woods System contributed to economic stability and rapid growth between 1945 and 1971 and discuss the future of the international monetary system in light of the Bretton Woods experience. Since President Richard M. Nixon ended the Bretton Woods System in 1971, exchange rates have exhibited increasing flexibility. After twenty years of floating rates, however, there is considerable interest in once again limiting exchange rate flexibility. The apparent success of the European Monetary System, a fixed-rate arrangement loosely based on the postwar system, and the prospect of European monetary unification increase interest in a new internationally stable exchange rate. Moreover, some academics and government officials see fixed rates as a way to help Eastern Europe and the former Soviet Union cope with pressing economic and political problems. The economists, historians, political scientists, and policy makers who contribute to this volume relate the Bretton Woods System to earlier fixed-rate schemes and consider the political background of the original New Hampshire meeting. Using recenteconomic theory - for example, work on time consistency and credibility - they explore adjustment, liquidity, and transmission under the System; the way it affected developing countries; and the role of the International Monetary Fund in maintaining a stable rate. The authors examine th

Measuring Core Inflation

Abstract: In this paper, we investigate the use of limited-information estimators as measures of core inflation. Employing a model of asymmetric supply disturbances, with costly price adjustment, we show how the observed skewness in the cross-sectional distribution of inflation can cause substantial noise in the aggregate price index at high frequencies. The model suggests that limited-influence estimators, such as the median of the cross-sectional distribution of inflation, will provide superior short-run measures of core inflation. We document that our estimates of inflation have a higher correlation with past money growth and deliver improved forecasts of future inflation relative to the CPI. Moreover, unlike the CPI, the limited-influence estimators do not forecast future money growth, suggesting that monetary policy has often accommodated supply shocks that we measure as the difference between core inflation and the CPI. Among the three limited-influence estimators we consider - the CP1 excluding food and energy, the IS-percent trimmed mean, and the median - we find that the median has the strongest relationship with past money growth and provides the most accurate forecast of future inflation. Using the median and several other variables including nominal interest rates and M2, our best forecast is that in the absence of monetary accommodation of any future aggregate supply shocks, inflation will average roughly 3 percent per year over the next five years.

The Role of Macroeconomic Factors in Growth

Abstract: Using a regression analog of growth accounting, I present cross- sectional and panel regressions showing that growth is negatively associated with inflation, large budget deficits, and distorted foreign exchange markets. Supplementary evidence suggests that the causation runs from macroeconomic policy to growth. The framework makes it possible to identify the channels of these effects: inflation reduces growth by reducing investment and productivity growth; budget deficits also reduce both capital accumulation and productivity growth. Examination of exceptional cases shows that while low inflation and small deficits are not necessary for high growth even over long periods, high inflation is not consistent with sustained growth.

Interest Rate Policy and the Inflation Scare Problem: 1979-1992

Abstract: Institutional knowledge of Federal Reserve policy procedures, simple economic theory, and the inflation scare concept explain interest rate policy as practiced by the Fed since 1979. The focus is the primary policy problem during the period: the acquisition and maintenance of credibility for the commitment to low inflation.

Economic instability and aggregate investment

Abstract: Recent literature suggests that because investment expenditures are irreversible and can be delayed, they may be highly sensitive to uncertainty. The authors briefly summarize the theory, stressing its empirical implications. Then, using cross-section and time-series data for a set of developing and industrial countries, they explore the empirical relevance of irreversibility and uncertainty to aggregate investment. They find that: (a) the volatility of the marginal profitability of capital (a summary measure of uncertainty) affects investment as the theory suggests, but the effect is moderate, and greatest for developing countries; (b)this volatility has little correlation with indices of political instability used in recent studies of growth; (c) inflation is highly correlated with this volatility and is a robust determinant of investment and the marginal profitability ofcapital. The volatility of the real exchange rate also has an independent contribution in explaining investment; and (d) the relationship between inflation and investment is nonlinear, and different thresholds of inflation, where the relationship with investment becomes stronger, were detected for a group of high-inflation countries in Latin America and low-inflation economies in the Organization for Economic Cooperation and Development (OECD).

European Exchange Rate Credibility Before the Fall

Abstract: Realignment expectations which measure exchange rate credibility are analyzed for European exchange rates, using daily financial data since the inception of the EMS. It is difficult to find economically meaningful relationships between realignment expectations and macroeconomic variables, although there are signs that lower inflation improves credibility. Statistically, many movements to realignment expectations are common to ERM participants. There were few indications of poor ERM credibility before late August 1992; the dimensions of the currency crisis of September 1992 appear to have taken both policy-makers and private agents largely by surprise.

Indeterminacy of equilibria in a hyperinflationary world: Experimental evidence

Abstract: The authors design and study an OLG experimental economy where the government finances a fixed real deficit through seigniorage. The economy has continua of nonstationary rational expectations equilibria and two stationary rational expectations equilibria. The authors do not observe nonstationary rational expectations paths. Observed paths tend to converge close to, or somewhat below, the low inflation stationary state. The adaptive learning hypothesis is consistent with the data in selecting the low inflation stationary state rational expectations equilibrium as a long-run stationary equilibrium. Nevertheless, simple adaptive learning models do not capture the market uncertainty or the biases observed in the data. Copyright 1993 by The Econometric Society.

European exchange rate credibility before the fall

Abstract: Realignment expectations which measure exchange rate credibility are analyzed for European exchange rates, using daily financial data since the inception of the EMS. It is difficult to find economically meaningful relationships between realignment expectations and macroeconomic variables, although there are signs that lower inflation improves credibility. Statistically, many movements to realignment expectations are common to ERM participants. There were few indications of poor ERM credibility before late August 1992; the dimensions of the currency crisis of September 1992 appear to have taken both policy-makers and private agents largely by surprise. kw]Realignment; Expectations; Currency crisis; ERM; EMS JEL classification: F31

Percept-percept inflation in micro organizational research: an investigation of prevalence and effect.

Abstract: Analysis of 42,934 correlations indicated that self-report methods have produced percept-percept inflation in micro research on organizations. However, further analysis of a subsample of 11,710 cor...

Inflation regimes and the sources of inflation uncertainty

Abstract: This paper develops new time series measures of inflation uncertainty in the United States in the postwar period that account for the prospect of changing inflation regimes. The measures are constructed from estimates of a Markov switching model for inflation. Importantly, we show that rational forecasts derived from the Markov model are consistent with survey measures of inflation expectations. Our Markov model allows us to decompose uncertainty about future inflation into two components; a certainty equivalent component that ignores uncertainty about future inflation regimes, and a regime uncertainty component that reflects this uncertainty. Survey measures of inflation uncertainty, based on the dispersion of forecasts, appear more closely associated to the regime uncertainty component than the certainty equivalent component of inflation uncertainty. The regime uncertainty component also appears to have significant explanatory power in forecasting unemployment while the certainty equivalent component does not. Copyright 1993 by Ohio State University Press.

Macroeconomics - A European Text

Abstract: Part I Introduction to macroeconomics: what is macroeconomics? macroeconomic accounts. Part II The real macroeconomy: intertemporal budget constraints demand of the private sector the labour markets and equilibrium unemployment economic growth the real exchange rate. Part III Money and the aggregate demand: money and the demand for money monetary policy and the supply of money aggregate demand and output. Part IV Inflation and business cycles: aggregate supply and inflation money, inflation, and the exchange rate. Part V Macroeconomic policy: fiscal policy the limits of demand management supply-side policies. Part VI Financial markets and exchange rates: financial markets exchange rates in the short run. Part VII World policy issues: the international monetary system policy co-ordination and the EMS sovereign indebtedness. Epilogue: The future of Eastern Europe.

Rules, Reputation and Macroeconomic Policy Coordination

Abstract: Introduction Part I. General Issues: 1. Macroeconomic policy design and control theory - a failed partnership? 2. International policy coordination - a survey 3. The European road to monetary union Part II. Theory and Methodology: 4. The design of feedback rules in linear stochastic rational expectations models 5. Credibility and time consistency in a stochastic world 6. Should rules be simple? 7. Macroeconomic policy design using large econometric rational expectations models Part III. Fiscal and monetary policy in interdependent economies: 8. Macroeconomic policy design in an interdependent world 9. Does international macroeconomic policy coordination pay and is it sustainable?: a two-country analysis 10. International cooperation and reputation in an empirical two-bloc model 11. Fiscal policy coordination, inflation and reputation in a natural rate world 12. The use of simple rules for international policy coordination 13. Evaluating the extended target zone proposal for the G3 Bibliography Index.

Understanding Farmland Price Changes

Abstract: This paper develops a structural model of land prices which includes the multidimensional effects of inflation on capital-erosion, savings-return erosion, and real debt reduction as well as the effect of changes in the opportunity cost of capital. The results show that inflation and changes in the real returns on capital are major explanatory factors in farmland price swings in addition to returns to farming. Additionally, the effects of credit market constraints and expectations schemes are considered explicitly in the analytical model.

Search with Learning from Prices: Does Increased Inflationary Uncertainty Lead to Higher Markups?

Abstract: Aggregate cost uncertainty, arising from real shocks or unanticipated inflation, reduces the informativeness of prices by scrambling relative and aggregate variations. But when agents can acquire additional information, such increased noise may in fact lead them to become better informed, and price competition will intensify. We examine these issues in a model of search with learning, where consumers search optimally from an unknown price distribution while firms price optimally given consumers' search rules. We show that the decisive factor in whether inflation variability increases or reduces the incentive to search, and thereby market efficiency, is the size of informational costs.

Unobserved-Component Time Series Models With Markov-Switching Heteroscedasticity: Changes in Regime and the Link Between Inflation Rates and Inflation Uncertainty

Abstract: In this article, I first extend the standard unobserved-component time series model to include Hamilton's Markov-switching heteroscedasticity. This will provide an alternative to the unobserved-component model with autoregressive conditional heteroscedasticity, as developed by Harvey, Ruiz, and Sentana and by Evans and Wachtel. I then apply a generalized version of the model to investigate the link between inflation and its uncertainty (U.S. data, gross national product deflator, 1958:1–1990:4). I assume that inflation consists of a stochastic trend (random-walk) component and a stationary autoregressive component, following Ball and Cecchetti, and a four-state model of U.S. inflation rate is specified. By incorporating regime shifts in both mean and variance structures, I analyze the interaction of mean and variance over long and short horizons. The empirical results show that inflation is costly because higher inflation is associated with higher long-run uncertainty.

The Use of Monetary Aggregate to Target Nominal GDP

Abstract: This paper studies the possibility of using the broad monetary aggregate M2 to target the quarterly rate of growth of nominal GDP Our findings indicate that the Federal Reserve could probably guide M2 in a way that reduces not only the long-term average rate of inflation but also the variance of the annual rate of growth of nominal GDP An optimal M2 rule, derived from a simple VAR, reduces the mean ten-year standard deviation of annual GDP growth by over 20 percent Although there is uncertainty about this value because of both parameter uncertainty and stochastic shocks to the economy, we estimate that the probability that the annual variance would be reduced over a ten year period exceeds 85 percent A much simpler policy based on a single equation linking M2 and GDP is shown to be almost as successful in reducing this annual GDP variance Additional statistical tests indicate that M2 is a useful predictor of nominal GDP Moreover, a battery of recently developed tests for parameter stability fails to reject the hypothesis that the M2 - GDP link is stable, but the MI - GDP and monetary base - GDP relations are found to be highly unstable This evidence contradicts those who have argued that the M2 - GDP relation is so unstable in the short run that it cannot be used to reduce the variance of nominal GDP growth

Growth and the Effects of Inflation

Abstract: In this paper, we analyze the effects of changes in monetary growth rates in the context of models of endogenous growth when the demand for money comes from a cash-in-advance constraint We explore two alternative avenues through which the rate of inflation could affect the overall long-run rate of growth of the economy The first of these is through nominal rigidities in the tax code The particular rigidity that we examine is for depreciation allowances that are fixed in nominal terms The second avenue that we examine is a distortion of the labor-leisure choice when a Lucas-style model of effective labor is used In both cases, the welfare costs and growth effects of various monetary growth rules relative to a constant money supply are studied It is found that both the welfare costs of inflation and its growth effects are quite small at low to moderate levels of inflation However, at rates of inflation that are high by US standards but not uncommon in developing countries, the magnitude of both the growth effects and the welfare costs of inflation depend on the specification of the model If cash and credit goods are substitutes there are no growth effects and moderate welfare effects If the two goods are complements there are sizable growth effects and large welfare effects