Showing papers on "Inflation published in 2007"
TL;DR: In this paper, a dynamic stochastic general equilibrium (DSGE) model for the US economy is proposed, which incorporates many types of real and nominal frictions: sticky nominal price and wage setting, habit formation in consumption, investment adjustment costs, variable capital utilisation and fixed costs in production.
Abstract: We estimate a dynamic stochastic general equilibrium (DSGE) model for the US economy. The model incorporates many types of real and nominal frictions: sticky nominal price and wage setting, habit formation in consumption, investment adjustment costs, variable capital utilisation and fixed costs in production. It also contains many types of shocks including productivity, labour supply, investment, preference, cost-push and monetary policy shocks. Using Bayesian estimation techniques, the relative importance of the various frictions and shocks in explaining the US business cycle are empirically investigated. We also show that this model is able to outperform standard VAR and BVAR models in out-of-sample prediction.
3,115 citations
TL;DR: The authors examined whether the U.S. rate of price inflation has become harder to forecast and, to the extent that it has, what changes in the inflation process have made it so, and found that the univariate inflation process is well described by an unobserved component trend-cycle model with stochastic volatility or, equivalently, an integrated moving average process with time-varying parameters.
Abstract: We examine whether the U.S. rate of price inflation has become harder to forecast and, to the extent that it has, what changes in the inflation process have made it so. The main finding is that the univariate inflation process is well described by an unobserved component trend-cycle model with stochastic volatility or, equivalently, an integrated moving average process with time-varying parameters. This model explains a variety of recent univariate inflation forecasting puzzles and begins to explain some multivariate inflation forecasting puzzles as well.
962 citations
TL;DR: The authors argue that the divine coincidence of the new Keynesian framework is due to a special feature of the model: the absence of nontrivial real imperfections, namely real wage rigidities.
Abstract: Most central banks perceive a trade‐off between stabilizing inflation and stabilizing the gap between output and desired output. However, the standard new Keynesian framework implies no such trade‐off. In that framework, stabilizing inflation is equivalent to stabilizing the welfare‐relevant output gap. In this paper, we argue that this property of the new Keynesian framework, which we call the divine coincidence, is due to a special feature of the model: the absence of nontrivial real imperfections. We focus on one such real imperfection, namely, real wage rigidities. When the baseline new Keynesian model is extended to allow for real wage rigidities, the divine coincidence disappears, and central banks indeed face a trade‐off between stabilizing inflation and stabilizing the welfare‐relevant output gap. We show that not only does the extended model have more realistic normative implications, but it also has appealing positive properties. In particular, it provides a natural interpretation for the dynamic inflation‐unemployment relation found in the data.
704 citations
TL;DR: In this article, welfare-maximizing monetary and fiscal-policy rules are studied in a model with sticky prices, money, and distortionary taxation, and the main findings are that the size of the inflation coefficient in the interest-rate rule plays a minor role for welfare.
656 citations
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TL;DR: In this article, a counterfactual simulation with a simple model of the housing market shows that this deviation may have been a cause of the boom and bust in housing starts and inflation in the last two years.
Abstract: Since the mid-1980s, monetary policy has contributed to a great moderation of the housing cycle by responding more proactively to inflation and thereby reducing the boom bust cycle. However, during the period from 2002 to 2005, the short term interest rate path deviated significantly from what this two decade experience would suggest is appropriate. A counterfactual simulation with a simple model of the housing market shows that this deviation may have been a cause of the boom and bust in housing starts and inflation in the last two years. Moreover, a significant time series correlation between housing price inflation and delinquency rates suggests that the poor credit assessments on subprime mortgages may also have been caused by this deviation.
598 citations
TL;DR: In this article, the authors characterize the macroeconomic performance of a set of industrialized economies in the aftermath of the oil price shocks of the 1970s and of the last decade, focusing on the differences across episodes.
Abstract: We characterize the macroeconomic performance of a set of industrialized economies in the aftermath of the oil price shocks of the 1970s and of the last decade, focusing on the differences across episodes. We examine four different hypotheses for the mild effects on inflation and economic activity of the recent increase in the price of oil: (a) good luck (i.e. lack of concurrent adverse shocks), (b) smaller share of oil in production, (c) more flexible labor markets, and (d) improvements in monetary policy. We conclude that all four have played an important role.
584 citations
TL;DR: In this paper, the authors characterize the macroeconomic performance of a set of industrialized economies in the aftermath of the oil price shocks of the 1970s and of the last decade, focusing on the differences across episodes.
Abstract: We characterize the macroeconomic performance of a set of industrialized economies in the aftermath of the oil price shocks of the 1970s and of the last decade, focusing on the differences across episodes. We examine four different hypotheses for the mild effects on inflation and economic activity of the recent increase in the price of oil: (a) good luck (i.e. lack of concurrent adverse shocks), (b) smaller share of oil in production, (c) more flexible labor markets, and (d) improvements in monetary policy. We conclude that all four have played an important role.
547 citations
TL;DR: The authors argue that prevailing models of inflation are too country-centric, in the sense that they fail to take sufficient account of the role of global factors in influencing the inflation process, and they find some rather striking prima facie evidence that this has indeed been the case.
Abstract: There has been mounting evidence that the inflation process has been changing. Inflation is now much lower and much more stable around the globe. And its sensitivity to measures of economic slack and increases in input costs appears to have declined. Probably the most widely supported explanation for this phenomenon is that monetary policy has been much more effective. There is no doubt in our mind that this explanation goes a long way towards explaining the better inflation performance we have observed. In this paper, however, we begin to explore a complementary, rather than alternative, explanation. We argue that prevailing models of inflation are too “country-centric”, in the sense that they fail to take sufficient account of the role of global factors in influencing the inflation process. The relevance of a more “globe-centric” approach is likely to have increased as the process of integration of the world economy has gathered momentum, a process commonly referred to as “globalisation”. In a large cross-section of countries, we find some rather striking prima facie evidence that this has indeed been the case. In particular, proxies for global economic slack add considerable explanatory power to traditional benchmark inflation rate equations, even allowing for the influence of traditional indicators of external influences on domestic inflation, such as import and oil prices. Moreover, the role of such global factors has been growing over time, especially since the 1990s. And in a number of cases, global factors appear to have supplanted the role of domestic measures of economic slack.
540 citations
TL;DR: This article developed a model of a monetary economy in which individual firms are subject to idiosyncratic productivity shocks as well as general inflation, and calibrated this cost and the variance and autocorrelation of the idiosyncratic shock using a new U.S. data set of individual prices due to Klenow and Kryvtsov.
Abstract: This paper develops a model of a monetary economy in which individual firms are subject to idiosyncratic productivity shocks as well as general inflation. Sellers can change price only by incurring a real “menu cost.” We calibrate this cost and the variance and autocorrelation of the idiosyncratic shock using a new U.S. data set of individual prices due to Klenow and Kryvtsov. The prediction of the calibrated model for the effects of high inflation on the frequency of price changes accords well with international evidence from various studies. The model is also used to conduct numerical experiments on the economy’s response to various shocks. In none of the simulations we conducted did monetary shocks induce large or persistent real responses.
528 citations
TL;DR: In this article, the authors consider generic Taylor-type rules, where the monetary authority reacts in response to output, inflation, and exchange-rate movements, and find that terms-of-trade movements do not contribute significantly to domestic business cycles.
525 citations
TL;DR: In this article, the authors present a survey of the state-of-the-art technologies used in the development of the VAR-VAR-MULTI-LIFT algorithm.
Abstract: В работе проверяется степень влияния валютного курса и цен импорта на колебания индекса цен потребителей и производителей (CPI и PPI) в некоторых развитых экономиках. Для оценки используется VAR-модель. Результат анализа показал, что в период после краха Бреттон-Вудской системы наблюдалось достаточно скромное влияние валютных курсов на уровень инфляции, в то время как цены импорта оказывали существенное воздействие на этот показатель. Кроме того, влияние курса на цены было сильнее в тех странах, в которых доля импорта больше. В период 1996-1998 гг. валютный курс и цены импорта играли важную роль в процессе дефляции во многих странах, чего, однако, нельзя сказать об экономике США.
TL;DR: The authors used a New Keynesian model to draw inferences about the behavior of the Federal Reserve's unobserved inflation target and found that the target rose from 1 1/4 percent in 1959 to over 8 percent in the mid-to-late 1970s before falling back below 2 1/2 percent in 2004.
Abstract: This paper estimates a New Keynesian model to draw inferences about the behavior of the Federal Reserve’s unobserved inflation target. The results indicate that the target rose from 1 1/4 percent in 1959 to over 8 percent in the mid-to-late 1970s before falling back below 2 1/2 percent in 2004. The results also provide some support for the hypothesis that over the entire postwar period, Federal Reserve policy has systematically translated short-run price pressures set off by supply-side shocks into more persistent movements in inflation itself, although considerable uncertainty remains about the true source of shifts in the inflation target. JEL: E31, E32, E52.
TL;DR: In this paper, a political economy model is presented in which equilibrium inflation is positively related to the degree of inequality in income due to the relative vulnerability to inflation of low income households.
TL;DR: This paper explore the role of real wage dynamics in a New Keynesian business cycle model with search and matching frictions in the labor market and show that the model fails to generate a Beveridge curve: vacancies and unemployment are positively correlated.
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TL;DR: A long-run link between money and prices is evident for the United States since the Korean War if the M2 measure of money is used and the velocity of M2 (V2) is modeled as a mean-reverting series as mentioned in this paper.
Abstract: A long-run link between money and prices is evident for the United States since the Korean War if the M2 measure of money is used and the velocity of M2 (V2) is modeled as a mean-reverting series. This link between M2 and prices is the basis for a dynamic model of inflation that compares favorably in forecasting exercises with Phillips-curve and more typical monetarist approaches. The behavior of V2 is examined from 1870 to the present, providing a basis for reconsidering previous findings that V2 follows a random walk. Copyright 1991 by American Economic Association.
TL;DR: In this paper, the authors examined the effect of crude oil prices on the prices of 35 internationally traded primary commodities for the 1960-2005 period and found that the pass-through of the crude oil price changes to the overall non-energy commodity index is 0.16.
TL;DR: In this article, the persistence of inflation in the United States has been investigated over time using different measures and estimation procedures and they produce confidence intervals for their estimates as well as formal tests of unchanged persistence.
TL;DR: In this article, a counterfactual simulation with a simple model of the housing market shows that this deviation may have been a cause of the boom and bust in housing starts and inflation in the last two years.
Abstract: Since the mid-1980s, monetary policy has contributed to a great moderation of the housing cycle by responding more proactively to inflation and thereby reducing the boom bust cycle. However, during the period from 2002 to 2005, the short term interest rate path deviated significantly from what this two decade experience would suggest is appropriate. A counterfactual simulation with a simple model of the housing market shows that this deviation may have been a cause of the boom and bust in housing starts and inflation in the last two years. Moreover, a significant time series correlation between housing price inflation and delinquency rates suggests that the poor credit assessments on subprime mortgages may also have been caused by this deviation.
TL;DR: In this paper, the authors study optimal Taylor-type interest rate rules in an economy with credit market imperfections and find that a strong anti-inflationary stance always attains the highest level of welfare.
TL;DR: The authors examines three empirically plausible processes to show that predictions of conventional models are sensitive to even small deviations from the assumption of constant-parameter policy rules and derives restrictions on that process that satisfy a long-run Taylor principle and deliver unique equilibria.
Abstract: Recurring change in a monetary policy function that maps endogenous variables into policy choices alters both the nature and the efficacy of the Taylor principle---the proposition that central banks can stabilize the macroeconomy by raising their interest rate instrument more than one-for-one in response to higher inflation. A monetary policy process is a set of policy rules and a probability distribution over the rules. We derive restrictions on that process that satisfy a long-run Taylor principle and deliver unique equilibria in two standard models. A process can satisfy the Taylor principle in the long run, but deviate from it in the short run. The paper examines three empirically plausible processes to show that predictions of conventional models are sensitive to even small deviations from the assumption of constant-parameter policy rules.
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TL;DR: In this paper, the authors describe how the world achieved a working consensus on the core principles of monetary policy, including the priority for price stability, the targeting of core rather than headline inflation, and the importance of credibility for low inflation.
Abstract: This article tells how the world achieved a working consensus on the core principles of monetary policy. The story begins with the muddled state of affairs in the late 1970s. It then asks: How did Federal Reserve policy produce an understanding of the practical principles of monetary policy? How did formal institutional support abroad for targeting low inflation follow from an international acceptance of these ideas? And how did a consensus theoretical model develop in academia? The article tells how the modern theoretical consensus known as the New Neoclassical Synthesis (aka, the New Keynesian model) reinforces key advances: the priority for price stability, the targeting of core rather than headline inflation, the importance of credibility for low inflation, and preemptive interest rate policy supported by transparent objectives and procedures. The conclusion identifies important practical issues that remain to be explored in theory.
TL;DR: In this paper, the authors examined a large data set of Mexican consumer prices covering episodes of both low and high inflation and found that both the frequency and average magnitude of price changes are important determinants of inflation.
Abstract: This paper provides new insight into the relationship between inflation and the setting of individual prices by examining a large data set of Mexican consumer prices covering episodes of both low and high inflation. When the annual rate of inflation is low (below 10%–15%), the frequency of price changes comoves weakly with inflation because movements in the frequency of price decreases and increases partly offset each other. In contrast, the average magnitude of price changes correlates strongly with inflation because it is sensitive to movements in the relative shares of price increases and decreases. When inflation rises beyond 10%–15%, few price decreases are observed and both the frequency and average magnitude are important determinants of inflation. I show that a menu-cost model with idiosyncratic technology shocks predicts the average frequency and magnitude of price changes well over a range of inflation similar to that experienced by Mexico.
TL;DR: In this paper, the authors estimate Taylor (1993) rules and identify monetary policy shocks using no-arbitrage pricing techniques, and find that inflation and output gap account for over half of the variation of time-varying excess bond returns and most of the movements in the term spread.
Abstract: We estimate Taylor (1993) rules and identify monetary policy shocks using no-arbitrage pricing techniques. Long-term interest rates are risk-adjusted expected values of future short rates and thus provide strong over-identifying restrictions about the policy rule used by the Federal Reserve. The no-arbitrage framework also accommodates backward-looking and forward-looking Taylor rules. We find that inflation and output gap account for over half of the variation of time-varying excess bond returns and most of the movements in the term spread. Taylor rules estimated with no-arbitrage restrictions differ from Taylor rules estimated by OLS, and the resulting monetary policy shocks are somewhat less volatile than their OLS counterparts.
TL;DR: The authors developed a new approach to identify macroeconomic shocks that exploits model-based empirical shock measures, and found little evidence that fiscal policy shocks are an important source of interest rate variability.
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TL;DR: The authors examined the degree of Exchange Rate Pass-Through (ERPT) to prices in 12 emerging markets in Asia, Latin America, and Central and Eastern Europe, based on three alternative vector autoregressive models, partly overturn the conventional wisdom that ERPT into both import and consumer prices is always higher in emerging countries than in developed countries.
Abstract: This paper examines the degree of Exchange Rate Pass-Through (ERPT) to prices in 12 emerging markets in Asia, Latin America, and Central and Eastern Europe. Our results, based on three alternative vector autoregressive models, partly overturn the conventional wisdom that ERPT into both import and consumer prices is always higher in "emerging" than in "developed" countries. For emerging markets with only one digit inflation (most notably the Asian countries), passthrough to import and consumer prices is found to be low and not very dissimilar from the levels of developed economies. The paper also finds robust evidence for a positive relationship between the degree of the ERPT and inflation, in line with Taylor's hypothesis once two outlier countries (Argentina and Turkey) are excluded from the analysis. Finally, the presence of a positive link between import openness and ERPT, while plausible theoretically, finds only weak empirical support.
TL;DR: In this article, the inclusion of a durable goods sector in sticky-price models has strong and unexpected implications, and the authors suggest that durable goods prices are the most relevant data for calibrating price rigidity.
Abstract: The inclusion of a durable goods sector in sticky-price models has strong and unexpected implications. Even if most prices are flexible, a small durable goods sector with sticky prices may be sufficient to make aggregate output react to monetary policy as though most prices were sticky. In contrast, flexibly priced durables with sufficiently long service lives can undo the implications of standard sticky price models. In a limiting case, flexibly priced durables cause monetary policy to have no effect on aggregate output. Our analysis suggests that durable goods prices are the most relevant data for calibrating price rigidity. (JEL E21, E23, E31, E52)
TL;DR: The authors showed that even low trend inflation has strong effects on optimal monetary policy and the dynamics of inflation, output, and interest rates, and that targeting non-zero trend inflation leads to substantial welfare losses.
TL;DR: This paper investigated the empirical relevance of a new framework for monetary policy analysis in which the decision makers are allowed, but not required, to weight differently positive and negative deviations of inflation and output from the target values.
TL;DR: This article showed that when credit rationing occurs increasing the rate of inflation can be welfare improving and that the gains in welfare come from the payment of interest on deposits and not from relaxing borrowers' liquidity constraints.
TL;DR: The authors evaluate the treatment effect of inflation targeting in seven industrial countries that adopted this policy in the 1990s and show that it has no significant effects on either inflation or inflation variability in these seven countries.