Showing papers on "Inflation published in 1994"
TL;DR: In this paper, the use of forward interest rates as a monetary policy indicator is demonstrated, using Sweden 1992-1994 as an example, and the forward rates are interpreted as indicating market expectations of the time-path of future interest rates, future inflation rates, and future currency depreciation rates.
Abstract: The use of forward interest rates as a monetary policy indicator is demonstrated, using Sweden 1992-1994 as an example. The forward rates are interpreted as indicating market expectations of the time-path of future interest rates, future inflation rates, and future currency depreciation rates. They separate market expectations for the short, medium and long term more easily than the standard yield curve. Forward rates are estimated with an extended and more flexible version of Nelson and Siegel's functional form.
871 citations
TL;DR: In this paper, a menu-cost model is presented in which positive trend inflation causes firms' relative prices to decline automatically between price adjustments, and shocks that raise firms' desired prices trigger larger price responses than shocks that lower desired prices.
Abstract: This paper considers a possible explanation for asymmetric adjustment of nominal prices. The authors present a menu-cost model in which positive trend inflation causes firms' relative prices to decline automatically between price adjustments. In this environment, shocks that raise firms' desired prices trigger larger price responses than shocks that lower desired prices. The authors use this model of asymmetric adjustment to address three issues in macroeconomics: the effects of aggregate demand, the effects of sectoral shocks, and the optimal rate of inflation. Copyright 1994 by Royal Economic Society.
549 citations
TL;DR: In this article, the authors proposed a new method for estimating potential output in which potential real gross domestic product (GDP) is modeled as an unobserved stochastic trend, and deviations of GDP from potential affect inflation through an aggregate supply relationship.
Abstract: This article proposes a new method for estimating potential output in which potential real gross domestic product (GDP) is modeled as an unobserved stochastic trend, and deviations of GDP from potential affect inflation through an aggregate supply relationship. The output and inflation equations together form a bivariate unobserved-components model which is estimated via maximum likelihood through the use of the Kalman-filter algorithm. The procedure yields a measure of potential output and its standard error and an estimate of the quantitative response of inflation to real growth and the output gap.
482 citations
TL;DR: In this paper, the authors identify a demand shift towards nontradables and faster growth of total factor productivity in the tradable goods sector as the prime causes of differential inflation in the two sectors.
471 citations
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TL;DR: In this paper, the use of forward interest rates as a monetary policy indicator is demonstrated, using Sweden 1992-1994 as an example, and the forward rates are interpreted as indicating market expectations of the time-path of future interest rates, future inflation rates, and future currency depreciation rates.
Abstract: The use of forward interest rates as a monetary policy indicator is demonstrated, using Sweden 1992-1994 as an example. The forward rates are interpreted as indicating market expectations of the time-path of future interest rates, future inflation rates, and future currency depreciation rates. They separate market expectations for the short-, medium-, and long-term more easily than the standard yield curve. Forward rates are estimated with an extended and more flexible version of Nelson and Siegel’s functional form.
461 citations
TL;DR: This paper found evidence that the long end of the term structure has information about future growth of industrial production beyond expectations about future monetary policy, and that foreign term structures can forecast domestic low frequency movements in economic activity especially in countries that experience high and variable rates of inflation.
349 citations
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TL;DR: In this paper, the authors examine the empirical evidence on the relationship between CBI and economic performance and conclude that there is indeed a tradeoff between price and output stability, and make the distinction between goal independence and instrument independence for the central bank.
Abstract: The case for an independent central bank is becoming increasingly accepted. This new orthodoxy is based on three foundations: the success of the Bundesbank and the German economy over the past forty years; the theoretical academic literature on the inflationary bias of discretionary policy-making; and the empirical academic literature on central bank independence (CBI). The purpose of this paper is to examine each of the three legs of the argument for increased CBI. ; First we examine the empirical evidence on the relationship between CBI and economic performance. In this context, we compare the German experience with that in the US and conclude that there is indeed a tradeoff between price and output stability. We also examine the sacrifice ratios in recent disinflations and show that sacrifice ratios are positively correlated with CBI. ; Second we present a theoretical model which allows us to consider the optimal degree of inflation aversion of the central bank. We show that society will be better off if the central bank precommits to an inflation rate, provided the fiscal authority is reasonably well behaved. We tie these conclusions to the literature on optimal incentive contracts for central banks. ; Finally we make the distinction between goal independence and instrument independence for the central bank. Given that a tradeoff exists between output and inflation variability, the tradeoff should not be left to the central bank, that is it should not have goal independence. Rather the goals for the central bank should be clearly specified, so that the central bank then can be accountable for achieving these goals. However, it should be free in its choice of means to achieve these goals.
346 citations
TL;DR: The authors conducted a wide-ranging investigation of the post-war U.S. Phillips correlations and Phillips curve and found that a strikingly stable negative correlation exists over the business cycle, and recent theory indicates the Lucas-Sargent critique may not be empirically relevant.
282 citations
TL;DR: This article gave a survey of oil market events with macroeconomic consequences and discussed hypotheses about the nature of the link and efforts to incorporate oil in macroeconomic models, and also advanced sectoral imbalance and uncertainty as leading hypotheses to explain the apparent asymmetry in the macroeconomic effects of oil price changes.
Abstract: The last twenty years have seen a number of oil-price changes with macroeconomic effects. Oil price increases spur inflation and produce recessions. Oil price declines dampen inflation, but do not necessarily boost real activity. The correlations can be traced back to World War II. The paper gives a survey of oil market events with macroeconomic consequences. It also discusses hypotheses about the nature of the link and efforts to incorporate oil in macroeconomic models. Business cycle research has recently advanced sectoral imbalance and uncertainty as leading hypotheses to explain the apparent asymmetry in the macroeconomic effects of oil price changes.
237 citations
TL;DR: In this article, the scalar field is forced to stay near the maximum of its potential in the core of topological defects, where the scalars are forced to follow a topological curvature.
Abstract: Inflation can occur in the cores of topological defects, where the scalar field is forced to stay near the maximum of its potential This topological inflation does not require fine-tuning of the initial conditions
230 citations
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TL;DR: In this paper, the effects of sustained capital accumulation on an evolving system of payments, in addition to the conventional effects of inflation on growth, are examined, and the results are consistent with ideas about money and growth contained in work that predates that of James Tobin and Miguel Sidrauski, as well as with evidence that money and asset demands vary systematically within economies.
Abstract: This paper takes an alternative approach to the topic of money and growth by developing a model in which the effects of sustained capital accumulation on an evolving system of payments, in addition to the conventional effects of sustained inflation on growth, are examined. While the effects of inflation on growth are small, the effects of growth on the monetary system are substantial. The results are consistent with ideas about money and growth contained in work that predates that of James Tobin and Miguel Sidrauski, as well as with evidence that money and asset demands vary systematically within economies as they develop. Copyright 1994 by American Economic Association.
01 Jan 1994
TL;DR: In this article, international scholars evaluate Chile's stabilization policy, economic growth, privatization, reform of the social security system, and the politics of economic reform, and propose what Chile must do to sustain growth in the future.
Abstract: Following years of hyperinflation and domestic turmoil, Chile undertook a series of dramatic economic reforms. In this book, international scholars evaluate Chile's stabilization policy, economic growth, privatization, reform of the social security system, and the politics of economic reform. Now that many of the original reforms have been largely completed, and Chile has maintained a coherent macroeconomic policy with slowly declining inflation, the authors prescribe what Chile must do to sustain growth in the future.
TL;DR: In this paper, the authors present a general equilibrium monetary model in which inflation distorts a variety of marginal decisions and show that individually none of the distortions is very large, they combine to yield substantial welfare cost estimates.
Abstract: This paper presents a general equilibrium monetary model in which inflation distorts a variety of marginal decisions. Although individually none of the distortions is very large, they combine to yield substantial welfare cost estimates. A sustained 4% inflation like that experienced in the U.S. since 1983 costs the economy the equivalent of 0.41% of output per year when currency is identified as the relevant definition of money and over 1% of output per year when M1 is defined as money. The results illustrate how the traditional, partial equilibrium approach can seriously underestimate the true cost of inflation.
TL;DR: The authors analyzes the choice of a nominal anchor in disinflation programs in chronic inflation countries and concludes that a high degree of currency substitution favors the exchange rate as the nominal anchor.
Abstract: This paper analyzes the choice of a nominal anchor in disinflation programs in chronic inflation countries. Both theory and evidence suggest several conclusions. (i) The recessionary effects associated with disinflation appear in the early stages of money-based programs but only in the late stages of exchange rate-based programs. (ii) Lack of credibility is more disruptive under fixed exchange rates than under floating exchange rates. (iii) Attempting to pursue a disinflationary policy while maintaining a given level of the real exchange rate is likely to be self-defeating. (iv) A high degree of currency substitution favors the exchange rate as the nominal anchor.
TL;DR: In this paper, it was shown that inflation is lower the higher central bank independence and that, given independence, countries that pre-announce monetary policy have even lower rates of inflation.
Abstract: ing from details, these conclusions imply that inflation is lower the higher is CBI and that, given independence, countries that pre-announce monetary policy have even lower rates of inflation. Furthermore, there is no evidence that CBI retards growth or investment. As a matter of fact, for LDCs, the evidence points in the opposite direction. Low independence is associated with lower growth and investment. Some economists feel that excessive independence may interfere with the potential stabilisatory function of monetary policy. Since fluctuations in the growth rate of the economy are found to be unrelated to CBI, this does not appear to be the case. III. COMMITMENT VIA CENTRAL BANK INDEPENDENCE AND
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01 Jan 1994
TL;DR: Corden as discussed by the authors provides a probing analysis of significant economic trends associated with the increasing integration of the world capital market, including exchange rate policy, the current account, and external effects of fiscal policy.
Abstract: An ambitious successor to W Max Corden's highly acclaimed "Inflation, Exchange Rates, and the World Economy," this book addresses topics in international macroeconomics that have come to the forefront of economic policy debates in recent years Covering exchange rate policy, the European Monetary System, protection and competition, and the international "non-system" since the collapse of Bretton Woods, Corden provides a probing analysis of significant economic trends associated with the increasing integration of the world capital marketBeginning with essays on exchange rate policy, the current account, and external effects of fiscal policy, Corden lays out the foundations of balance-of-payments theory in relation to wage rates, income distribution, and inflation Chapters on the European Monetary System focus on monetary integration and look skeptically at European proposals to move toward monetary union Other topical essays discuss the "competitiveness" problem and the relation between protection and macroeconomic policyCorden summarizes and clarifies a vast range of work on the coordination of macroeconomic policies and critically reviews various proposals for reforming the international monetary system
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TL;DR: In this article, the use of forward interest rates as a monetary policy indicator is demonstrated, using Sweden between 1992 and 1994 as an example, and the forward rates are interpreted as indicating market expectations of the time-path of future interest rates, future inflation rates, and future currency depreciation rates.
Abstract: The use of forward interest rates as a monetary policy indicator is demonstrated, using Sweden between 1992 and 1994 as an example. The forward rates are interpreted as indicating market expectations of the time-path of future interest rates, future inflation rates, and future currency depreciation rates. They separate market expectations for the short, medium and long term more easily than the standard yield curve. Forward rates are estimated with an extended and more flexible version of Nelson and Siegel's functional form.
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TL;DR: In this article, the authors used the broad monetary aggregate M2 to target the quarterly rate of growth of nominal GDP and found that the M2-GDP relationship is stable in the short run but highly unstable in the long run.
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.
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TL;DR: The authors examined the evidence on asymmetries in the effects of activity on inflation and found that high levels of activity raising inflation by more than low levels decrease it, and that policymakers can raise the average level of output over time by responding promptly to demand shocks, thus reducing the variance of output around trend.
Abstract: This paper examines the evidence on asymmetries in the effects of activity on inflation. Data for the G-7 countries are found to strongly support the view that the inflation-activity relationship is nonlinear, with high levels of activity raising inflation by more than low levels decrease it. In the face of such asymmetries, the average level of output in an economy subject to demand shocks will be below the level of output at which there is no tendency for inflation to rise or fall, contrary to the implications of linear models. One implication of these results is that policymakers can raise the average level of output over time by responding promptly to demand shocks, thus reducing the variance of output around trend.
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TL;DR: In this article, the authors examine the discrepancies that arise between the CPI and the true cost-of-living index as a result of improvements in the quality of goods, the introduction of new goods, substitution on the part of consumers between different goods and retail outlets, and the difficulty of measuring the prices actually paid by consumers for the goods they purchase.
Abstract: The consumer price index (CPI) is probably the most closely watched indicator of inflation in the U.S. economy. In this article, Mark Wynne and Fiona Sigalla explain the construction of the CPI and evaluate some of its potential shortcomings as a measure of inflation. Specifically, they examine the discrepancies that arise between the CPI and the true cost- of-living index as a result of improvements in the quality of goods, the introduction of new goods, substitution on the part of consumers between different goods and retail outlets, and the difficulty of measuring the prices actually paid by consumers for the goods they purchase. ; The authors review the literature that quantifies these discrepancies, with the objective of estimating the magnitude of the overall bias in the CPI. Wynne and Sigalla argue that, in fact, remarkably little is known about the extent or significance of the overall bias in the CPI. They conclude that biases in the CPI cause it to overstate inflation by no more than 1 percent a year, and probably less.
TL;DR: In this paper, the empirical validity of PPP as a long-run equilibrium relationship in a sample of thirteen "high-inflation" countries using quarterly data over the modern floating period and recently developed techniques of cointegration and error-correction model.
TL;DR: In this article, the authors design and analyze experimental versions of monetary overlapping generations economies under alternative policy regimes and compare their time series with rational expectations equilibrium paths and adaptive learning dynamics, and also examine the behavior of an economy with no stationary competitive equilibrium.
Abstract: We design and analyze experimental versions of monetary overlapping generations economies under alternative policy regimes. Economies with a constant level of real deficit financed through seignorage, economies in which the level of deficit is adapted in order to follow a monetary policy with a target rate of inflation, and economies with preannounced changes in deficit levels are reported here. We also examine the behavior of an economy with no stationary competitive equilibrium. Our time series are compared to rational expectations equilibrium paths and to adaptive learning dynamics.
TL;DR: In this article, the authors model delayed stabilizations as the rational outcome of a distributional conflict between two risk averse groups in the presence of post-stabilization payoff uncertainty and costly policy reversion.
Abstract: In this paper we model delayed stabilizations as the rational outcome of a distributional conflict between two risk averse groups in the presence of post-stabilization payoff uncertainty and costly policy reversion. We show that in the initial stages of an extreme inflation episode there is a bias towards maintaining the current inefficient (but certain) revenue collection system which prevents the adoption of the required fiscal adjustment program. The access by those with higher income to a financial adaptation technology increases the average rate of inflation through time for any given government deficit, raising the welfare costs of not reaching an agreement and increasingly redistributing the burden of inflation to those with lower income. This process, if strong enough, will eventually trigger the necessary political support for the required fiscal adjustment. Delayed stabilizations will, nevertheless, induce the poor into accepting conditions that they did not find optimal before.
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01 Jul 1994TL;DR: A taxonomy, axioms, and expenditures related to income: Keynes's D1 Category as mentioned in this paper is a taxonomy of the general theory and the classical system, with a focus on money, liquidity, and uncertainty.
Abstract: Contents: 1. The Background for Keynes's Revolution 2. The Essential Difference between the General Theory and the Classical System 3. Taxonomy, Axioms, and Expenditures Related to Income: Keynes's D1 Category 4. Investment Spending 5. Government and the Level of Output 6. Delving Further into the Relationship between Money, Liquidity and Uncertainty 7. Liquidity Preference - the Basis of Keynes's Revolution 8. The Finance Motive and the Interdependence of the Real and Monetary Sectors 9. Financial Markets, Fast Exits and Great Depressions and Recessions 10. Inflation: Causes and Cures 11. Keynes's Aggregate Supply and Demand Analysis 12. The Demand and Supply of Labour 13. Money in an International Setting 14. Trade Imbalances and International Payments 15. International Liquidity and Exchange Rate Stability 16. Financing the Wealth of Nations 17. Export-Led Growth and a Proposal for an International Payments Scheme 18. Epilogue: Truth in Labelling and Economic Textbooks Index
TL;DR: In this article, the authors extended the Ramsey-Romer model of endogenous growth to allow for holdings of real money balances and government debt as well as capital and for non-interconnected generations of households.
Abstract: The Ramsey-Romer model of endogenous growth is extended to allow for holdings of real money balances and government debt as well as capital and for non-interconnected generations of households. Tax-financed increases in government consumption and debt depress growth prospects and boost inflation, as long as a positive birth rate ensures that future taxes are shouldered by future, yet unborn, generations. Debt-financed increases in government consumption depress growth and boost inflation even more. Money-financed increases in government consumption depress growth less but increase inflation by more. Giving subsidies through an increase in monetary growth is non-neutral, since this increases real growth and thus inflation increases by a lesser amount than monetary growth. Bond-financed increases in monetary growth lead to a larger increase in real growth and a smaller increase in inflation. If there are cost adjustment for investment, cuts in monetary growth and increases in government debt and government consumption induce an increase in the real interest rate. Copyright 1994 by Ohio State University Press.
TL;DR: In this article, the authors present a theoretical and empirical analysis of policies aimed at setting a more depreciated level of the real exchange rate, which can be achieved by means of higher inflation and/or higher real interest rates, depending on the degree of capital mobility.
Abstract: This paper presents a theoretical and empirical analysis of policies aimed at setting a more depreciated level of the real exchange rate. An intertemporal optimizing model suggests that, in the absence of changes in fiscal policy, a more depreciated level of the real exchange can only be attained temporarily. This can be achieved by means of higher inflation and/or higher real interest rates, depending on the degree of capital mobility. Evidence for Brazil, Chile, and Colombia supports the model’s prediction that undervalued real exchange rates are associated with higher inflation.
TL;DR: The authors developed and tested a revised Partisan model that allows for uncertainty among policy authorities about the sustainable output growth rate and therefore about how aggregate demand expansions will be partitioned between extra output and extra inflation, and ex-post and projective learning and preference adjustment under such uncertainty.
Abstract: The “Partisan Theory” of macroeconomic policy is based on the idea that political parties typically weight nominal and real economic performance differently, with left-party governments being more inclined than right-party ones to pursue expansive policies designed to yield lower unemployment and higher growth, but running the risk of extra inflation. Given suitable assumptions about the structure of the macroeconomy, partisan models imply a political signal in demand management, output and inflation movements originating with shifts in party control of the government. In this paper I develop and test with postwar US data a revised Partisan model that allows for (i) uncertainty among policy authorities about the sustainable output growth rate and therefore about how aggregate demand expansions will be partitioned between extra output and extra inflation, and (ii) ex-post and projective learning and preference adjustment under such uncertainty. Dynamic numerical analysis of a small, stylized political-economic model based on these extensions of Partisan Theory generates within-sample forecasts that correspond remarkably well to the observed pattern of price, output and nominal spending fluctuations under the parties.