Showing papers on "Inflation published in 2011"
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TL;DR: In this article, a growth model that is consistent with salient features of the recent Chinese growth experience is presented, including high output growth, sustained returns on capital investment, extensive reallocation within the manufacturing sector, falling labor share and accumulation of a large foreign surplus.
Abstract: This paper constructs a growth model that is consistent with salient features of the recent Chinese growth experience: high output growth, sustained returns on capital investment, extensive reallocation within the manufacturing sector, falling labor share and accumulation of a large foreign surplus. The building blocks of the theory are asymmetric financial imperfections and heterogeneous productivity. Some firms use more productive technologies, but low-productivity firms survive because of better access to credit markets. Due to the financial imperfections, high-productivity firms — which are run by entrepreneurs — must be financed out of internal savings. If these savings are sufficiently large, the high-productivity firms outgrow the low-productivity firms and attract an increasing employment share. The downsizing of the financially integrated firms forces a growing share of domestic savings to be invested in foreign assets, generating a foreign surplus. A calibrated version of the theory can account quantitatively for China’s growth
920 citations
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TL;DR: In a low-inflation economy, the room for a decline in the real interest rate is small, because of the notorious lower limit of zero on the nominal interest rate.
Abstract: In a market-clearing economy, declines in demand from one sector do not cause large declines in aggregate output because other sectors expand. The key price mediating the response is the interest rate. A decline in the rate stimulates all categories of spending. But in a low-inflation economy, the room for a decline in the rate is small, because of the notorious lower limit of zero on the nominal interest rate. In the Great Depression, substantial deflation caused the real interest rate to reach high levels. In the Great Slump that began at the end of 2007, low inflation resulted in an only slightly negative real rate when full employment called for a much lower real rate because of declines in demand. Fortunately, the inflation rate hardly responded to conditions in product and labor markets, else deflation might have occurred, with an even higher real interest rate. I concentrate on three closely related sources of declines in demand: the buildup of excess stocks of housing and consumer durables, the corresponding expansion of consumer debt that financed the buildup, and financial frictions that resulted from the decline in real-estate prices. (JEL E23, E24, E31, E32, E65)
428 citations
TL;DR: The authors show that there is no credible evidence that monetary policy responses to oil price shocks caused large aggregate fluctuations in the 1970s and 1980s or more recently, and they suggest that the traditional monetary policy reaction framework should be replaced by models that take account of the endogeneity of the real price of oil and that allow policy response to depend on the underlying causes of oil price shock.
Abstract: A common view in the literature is that systematic monetary policy responses to the inflation caused by oil price shocks have been an important source of aggregate fluctuations in the US economy. Earlier empirical evidence in support of such a link was based on inappropriate econometric models. We show that there is no credible evidence that monetary policy responses to oil price shocks caused large aggregate fluctuations in the 1970s and 1980s or more recently. Our analysis suggests that the traditional monetary policy reaction framework should be replaced by models that take account of the endogeneity of the real price of oil and that allow policy responses to depend on the underlying causes of oil price shocks.
349 citations
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TL;DR: In this article, a dynamic model of households' mortgage decisions incorporating labor income, house price, inflation, and interest rate risk is proposed to solve a zero-profit condition for mortgage lenders to solve for equilibrium mortgage rates given borrower characteristics and optimal decisions.
Abstract: This paper solves a dynamic model of households' mortgage decisions incorporating labor income, house price, inflation, and interest rate risk. It uses a zero-profit condition for mortgage lenders to solve for equilibrium mortgage rates given borrower characteristics and optimal decisions. The model quantifies the effects of adjustable vs. fixed mortgage rates, loan-to-value ratios, and mortgage affordability measures on mortgage premia and default. Heterogeneity in borrowers' labor income risk is important for explaining the higher default rates on adjustable-rate mortgages during the recent US housing downturn, and the variation in mortgage premia with the level of interest rates.
293 citations
TL;DR: The authors developed a behavioral macroeconomic model in which agents have cognitive limitations, and they use simple but biased rules (heuristics) to forecast future output and inflation, although the rules are biased, agents learn from their mistakes in an adaptive way.
Abstract: I develop a behavioral macroeconomic model in which agents have cognitive limitations. As a result, they use simple but biased rules (heuristics) to forecast future output and inflation. Although the rules are biased, agents learn from their mistakes in an adaptive way. This model produces endogenous waves of optimism and pessimism (“animal spirits”) that are generated by the correlation of biased beliefs. I identify the conditions under which animal spirits arise. I contrast the dynamics of this model with a stylized DSGE-version of the model and I study the implications for monetary policies. I find that strict inflation targeting is suboptimal because it gives more scope for waves of optimism and pessimism to emerge thereby destabilizing output and inflation.
292 citations
TL;DR: In this paper, the standard New Keynesian model with a staggered wage setting is shown to imply a simple dynamic relation between wage inflation and unemployment, and that relation takes a form similar to that found in empirical applications and may thus be viewed as providing some theoretical foundations to the latter.
Abstract: The standard New Keynesian model with staggered wage setting is shown to imply a simple dynamic relation between wage inflation and unemployment. Under some assumptions, that relation takes a form similar to that found in empirical applications -starting with the original Phillips (1958) curve- and may thus be viewed as providing some theoretical foundations to the latter. The structural wage equation derived here is shown to account reasonably well for the comovement of wage inflation and the unemployment rate in the U.S. economy, even under the strong assumption of a constant natural rate of unemployment.
287 citations
TL;DR: This article analyzed the ability of sticky-price models to explain the dynamics of U.S. inflation when using survey data as proxies for inflation expectations, and found that the sticky price models are able to establish a close link between output dynamics and the behavior of unit labor costs.
Abstract: I. INTRODUCTION This paper analyzes the ability of sticky-price models to explain the dynamics of U.S. inflation when using survey data as proxies for inflation expectations. Testing sticky-price models with survey expectations is attractive since, to the extent that survey data correctly capture agents' expectations, they allow to disregard issues related to the specification of agents' expectations functions. One neither has to impose untested orthogonality restrictions, as required when estimating under the assumption of rational expectations, nor has to make restrictive assumptions about the precise form of nonrationality present in agents' forecast functions. This allows to focus on the question whether the economic models under consideration are correctly specified. Previous tests of sticky-price models, performed under the assumption that agents hold rational expectations, have generated mixed results. Prominently, Fuhrer and Moore (1995) have reported that sticky-price models do not generate sufficient stickiness for inflation when the output gap is used as a measure of real marginal costs. Recent evidence, however, has shown that the empirical performance depends crucially on how one measures real marginal costs, the main determinant of inflation according to sticky-price models. For instance, Gall and Gertler (1999) and Sbordone (2002) show that sticky-price models perform well once marginal costs are approximated by average unit labor costs. (1) It makes an important difference whether sticky-price models successfully explain inflation dynamics as a function of output behavior or they relate inflation dynamics to the behavior of unit labor costs. Given that the ultimate objective is a model explaining the joint behavior of output and inflation, the latter case would require an additional empirically plausible theory linking the dynamics of unit labor costs to the behavior of output. This paper studies whether the currently popular New Keynesian Phillips Curve (NKPC), which can be derived from Calvo (1983) style sticky-price models, is able to explain a relationship between inflation on the one hand and output or unit labor costs on the other hand. Thus, we let the data speak whether a theory linking output to costs is warranted, once expectations are approximated by data reported in the Survey of Professional Forecasters. Our main finding is that the NKPC performs equally well with both measures of marginal costs, output and unit labor costs. Whatever measure is used, the estimate of the quarterly discount factor is close to one and the point estimate of the degree of price stickiness implies that firms reset their prices roughly every five quarters on average. These results suggest that potential nonrationalities in expectations, as they show up in surveys, have biased previous estimates using output as a measure for marginal costs. Quite surprisingly, the same nonrationalities do not seem to play a role when using unit labor costs. Here our estimates confirm the results obtained by Gall and Gertler (1999) and Sbordone (2002), who assumed rational expectations. We show that the reason for this finding is that approximating the agents' information set using the unit labor cost variable rests on more solid grounds than approximating it using the output variable. In particular, the survey data suggest that the hypothesis of rational expectations implies a too high correlation between lagged output and future inflation expectations. We show that this causes the coefficient estimate for output to become negative, contrary to what is implied by theory. These results suggest that once one takes account of potentially nonrational expectations via survey expectations, sticky-price models are able to establish a close link between output dynamics and the behavior of inflation. To assess the robustness of this finding, we include into the price equation lags of various variables and test for their significance. …
287 citations
TL;DR: In this paper, the authors argue that the standard macroeconomic models have failed, by all the most important tests of scientific theory, and that there have been systemic changes to the structure of the economy that made the economy more vulnerable to crisis, contrary to what the standard models argued.
Abstract: The standard macroeconomic models have failed, by all the most important tests of scientific theory. They did not predict that the financial crisis would happen; and when it did, they understated its effects. Monetary authorities allowed bubbles to grow and focused on keeping inflation low, partly because the standard models suggested that low inflation was necessary and almost sufficient for efficiency and growth. After the crisis broke, policymakers relying on the models floundered. Notwithstanding the diversity of macroeconomics, the sum of these failures points to the need for a fundamental re-examination of the models—and a reassertion of the lessons of modern general equilibrium theory that were seemingly forgotten in the years leading up to the crisis. This paper first describes the failures of the standard models in broad terms, and then develops the economics of deep downturns, and shows that such downturns are endogenous. Further, the paper argues that there have been systemic changes to the structure of the economy that made the economy more vulnerable to crisis, contrary to what the standard models argued. Finally, the paper contrasts the policy implications of our framework with those of the standard models.
285 citations
TL;DR: The effects of asset purchase programs on macroeconomic variables are likely to be moderate as discussed by the authors, and they reach this conclusion after simulating the impact of the second large-scale asset purchase program (LSAP II) in a DSGE model enriched with a preferred habitat framework and estimated on U.S. data.
Abstract: The effects of asset purchase programs on macroeconomic variables are likely to be moderate. We reach this conclusion after simulating the impact of the Federal Reserve’s second large-scale asset purchase program (LSAP II) in a DSGE model enriched with a preferred habitat framework and estimated on U.S. data. Our simulations suggest that such a program increases GDP growth by less than half a percentage point, although the effect on the level of GDP is very persistent. The program’s marginal contribution to inflation is very small. One key reason for our findings is that we estimate a small degree of financial market segmentation. If we enrich the set of observables with a measure of long-term debt, the semi-elasticity of the risk premium to the amount of debt in private-sector hands is substantially smaller than that reported in the recent empirical literature. In this case, our baseline estimates of the effects of LSAP II on the macroeconomy decrease by at least a factor of two. Throughout the analysis, a commitment to an extended period at the zero lower bound for nominal interest rates increases the effects of asset purchase programs on GDP growth and inflation.
261 citations
TL;DR: In this article, the authors draw out the implications for monetary policy when currency misalignments are possible and find that these violations lead to a reduction in world welfare and that optimal monetary policy trades off targeting these misalignions with inflation and output goals.
Abstract: Exchange rates among large economies have fluctuated dramatically over the past 30 years. The dollar/euro exchange rate has experienced swings of greater than 60 percent. Even the Canadian dollar/US dollar exchange rate has risen and fallen by more than 35 percent in the past decade, but inflation rates in these countries have differed by only a percentage point or two per year. Should these exchange rate movements be a concern for policymakers? Or would it not be better for policymak ers to focus on output and inflation and let a freely floating exchange rate settle at a market determined level? Empirical evidence points to the possibility of "local-currency pricing" (LCP) or "pricing to market."1 Exporting firms may price discriminate among markets, and/ or set prices in the buyers' currencies. A currency could be overvalued if consumer prices are generally higher at home than abroad when compared in a common cur rency, or undervalued if these prices are lower at home.2 Currency misalignments can be very large even in advanced economies. In a simple, familiar framework, this paper draws out the implications for monetary policy when currency misalignments are possible. Currency misalignments lead to inefficient allocations for reasons that are analogous to the problems with inflation in a world of staggered price setting. When there are currency misalignments, households in the Home and Foreign countries may pay different prices for the identical good. A basic tenet of economics is that violations of the law of one price are inefficient—if the good's marginal cost is the same irrespective of where the good is sold, it is not efficient for the good to sell at different prices. We find that these violations lead to a reduction in world welfare and that optimal monetary policy trades off targeting these misalignments with inflation and output goals. In our model, because there are no transportation costs or distribution costs, any deviation from the law of one price would be inefficient. More generally, if those costs were to be included, then pricing
260 citations
TL;DR: In this article, the authors evaluate the effect of the Federal Reserve's purchase of long-term Treasuries and other longterm bonds (Treasuries, Agency bonds, and highly-rated corporate bonds) on interest rates.
Abstract: We evaluate the effect of the Federal Reserve’s purchase of long-term Treasuries and other long-term bonds ("QE1" in 2008-2009 and "QE2" in 2010-2011) on interest rates. Using an event-study methodology that exploits both daily and intra-day data, we find a large and significant drop in nominal interest rates on long-term safe assets (Treasuries, Agency bonds, and highly-rated corporate bonds). This occurs mainly because there is a unique clientele for long-term safe nominal assets, and the Fed purchases reduce the supply of such assets and hence increase the equilibrium safety-premium. We find only small effects on nominal (default-adjusted) interest rates on less safe assets such as Baa corporate rates. The impact of quantitative easing on MBS rates is large when QE involves MBS purchases, but not when it involves Treasury purchases, indicating that a second main channel for QE is to affect the equilibrium price of mortgage-specific risk. Evidence from inflation swap rates and TIPS show that expected inflation increased due to both QE1 and QE2, implying that reductions in real rates were larger than reductions in nominal rates. Our analysis implies that (a) it is inappropriate to focus only on Treasury rates as a policy target because QE works through several channels that affect particular assets differently, and (b) effects on particular assets depend critically on which assets are purchased.
TL;DR: The Taylor rule is not identified without unrealistic assumptions as mentioned in this paper, and the Taylor rule regressions do not show that the Fed moved from "passive" to "active" policy in 1980.
Abstract: The new-Keynesian, Taylor rule theory of inflation determination relies on explosive dynamics. By raising interest rates in response to inflation, the Fed induces ever-larger inflation, unless inflation jumps to one particular value on each date. However, economics does not rule out explosive inflation, so inflation remains indeterminate. Attempts to fix this problem assume that the government will choose to blow up the economy if alternative equilibria emerge, by following policies we usually consider impossible. The Taylor rule is not identified without unrealistic assumptions. Thus, Taylor rule regressions do not show that the Fed moved from “passive” to “active” policy in 1980.
TL;DR: The history of the Phillips curve (PC) has evolved in two phases, before and after 1975, with a widespread consensus about the pre-1975 evolution, which is well understood as discussed by the authors.
Abstract: While the early history of the Phillips curve up to 1975 is well known, less well understood is the post-1975 fork in the road. The left fork developed a theory of policy responses to supply shocks in the context of price stickiness in the non-shocked sector. Its econometric implementation interacts shocks with backward-looking inertia. The right fork approach emphasizes forward-looking expectations that can jump in response to anticipated policy changes. The left fork approach is better suited to explaining the postwar US inflation process, while the right fork approach is essential for understanding behaviour in economies with unstable macroeconomic environments. The history of the Phillips curve (PC) has evolved in two phases, before and after 1975, with a widespread consensus about the pre-1975 evolution, which is well understood. Bifurcation begins in 1975, when the PC literature split down two forks of the road, with little communication or interaction between the two forks. The major contribution of this paper, and hence the source of 'bifurcation' in its subtitle, is to examine, contrast and test the contributions of the two post-1975 forks. The pre-1975 history is straightforward and is covered in Section I. The initial discovery of the negative inflation-unemployment relation by Phillips, popularized by Samuelson and Solow, was followed by a brief period in which policy-makers assumed that they could exploit the trade-off to reduce unemployment at a small cost of additional inflation. Then the natural rate revolution of Friedman, Phelps and Lucas overturned the policy-exploitable trade-off in favour of long-run monetary neutrality. Those who had implemented the econometric version of the trade-off PC in the 1960s reeled in disbelief when Sargent demonstrated the logical failure of their test of neutrality, and finally were condemned to the 'wreckage' of Keynesian economics by Lucas and Sargent following the twist of the inflation-unemployment correlation from negative in the 1960s to positive in the 1970s. The architects of neutrality and the opponents of the Keynesian trade-off emerged triumphant, with two major caveats that their own models based on information barriers were unconvincing, and that their core result, that business cycles were driven by monetary or price surprises, floundered without supporting evidence. After 1975 the evolution of the PC literature split in two directions, each of which has largely failed to recognize the other's contributions. Section II reviews the 'left fork of the road', the revival of the PC trade-off in a coherent and integrated dynamic aggregate supply and demand framework that emerged in the late 1970s in econometric tests, in theoretical contributions, and in intermediate macro textbooks. This approach, which I have called 'mainstream', is resolutely Keynesian, because the inflation rate is dominated by persistence and inertia in the form of long lags on past inflation. An important difference between the mainstream approach and other post-1975 developments is that the role of past inflation is not limited to the formation of expectations, but also includes a pure persistence effect due to fixed-duration wage and price contracts, and lags between
TL;DR: In this article, the authors conducted an empirical analysis of the effects of oil price shocks on a developing country oil-exporter, Nigeria, and found that negative oil shocks significantly cause output and real exchange rate.
TL;DR: In this paper, Ed Nosal and Guillaume Rocheteau provide a comprehensive investigation into the economics of money and payments by explicitly modeling trading frictions between agents, and discuss the implications of such frictions for the suitable properties of a medium of exchange, monetary policy, the cost of inflation, the inflation-output trade-off, the coexistence of money, credit, and higher return assets, settlement, and liquidity.
Abstract: In Money, Payments, and Liquidity, Ed Nosal and Guillaume Rocheteau provide a comprehensive investigation into the economics of money and payments by explicitly modeling trading frictions between agents. Adopting the search-theoretic approach pioneered by Nobuhiro Kiyotaki and Randall Wright, Nosal and Rocheteau provide a logically coherent dynamic framework to examine the frictions in the economy that make money and liquid assets play a useful role in trade. They discuss the implications of such frictions for the suitable properties of a medium of exchange, monetary policy, the cost of inflation, the inflation-output trade-off, the coexistence of money, credit, and higher return assets, settlement, and liquidity.
After presenting the basic environment used throughout the book, Nosal and Rocheteau examine pure credit and pure monetary economies, and discuss the role of money, different pricing mechanisms, and the properties of money. In subsequent chapters they study monetary policy, the Friedman rule in particular, and the relationship between inflation and output under different information structures; economies where monetary exchange coexists with credit transactions; the coexistence of money and other assets such as another currency, capital, and bonds; and a continuous-time version of the model that describes over-the-counter markets and different dimensions of liquidity (bid-ask spreads, trade volume, trading delays).
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TL;DR: This article analyzed the evolution of U.S. break-even inflation from 1997 to mid-2008 and found that survey data on inflation uncertainty and proxies for liquidity premia are important factors.
Abstract: The difference between nominal and real interest rates (break-even inflation) is often used to gauge the market's inflation expectations-and has become an important tool in monetary policy analysis. However, break-even inflation can move in response to shifts in inflation risk premia and liquidity premia as well as to changes in expected inflation. This paper sheds light on this issue by analyzing the evolution of U.S. break-even inflation from 1997 to mid-2008. Regression results show that survey data on inflation uncertainty and proxies for liquidity premia are important factors.
TL;DR: In this article, the authors investigated the growth effects of inflation on a wide sample of countries, including both industrialized and emerging economies, and found that inflation non-linearly impacts economic growth.
TL;DR: Gorodnichenko et al. as discussed by the authors provided new theoretical results on restoring determinacy in New Keynesian models with positive trend inflation and combine these with new empirical findings on the Federal Reserve's reaction function before and after the Volcker disinflation to find that while the Fed satisfied the Taylor principle in the pre-Volcker era, the US economy was still subject to self-fulfilling fluctuations in the 1970s.
Abstract: Author(s): Gorodnichenko, Yuriy; Coibion, Olivier | Abstract: With positive trend inflation, the Taylor principle is not enough to guarantee a determinate equilibrium. We provide new theoretical results on restoring determinacy in New Keynesian models with positive trend inflation and combine these with new empirical findings on the Federal Reserve’s reaction function before and after the Volcker disinflation to find that 1) while the Fed satisfied the Taylor principle in the pre-Volcker era, the US economy was still subject to self-fulfilling fluctuations in the 1970s, 2) while the Fed’s response to inflation is not statistically different before and after the Volcker disinflation, the US economy nonetheless moved from indeterminacy to determinacy in this time period, 3) since the 1970s, the Fed has largely switched from responding to the output gap to responding to output growth, and 4) the change from indeterminacy to determinacy is due to the simultaneous decrease in the response to the output gap, increases in the response to inflation and output growth and the decline in steady-state inflation from the Volcker disinflation.
TL;DR: The authors examined inflation dynamics in the United States since 1960, with a particular focus on the Great Recession, and found that expectations have been fully "shock-anchored" since the 1980s, while "level anchoring" has been gradual and partial but significant.
Abstract: This paper examines inflation dynamics in the United States since 1960, with a particular focus on the Great Recession. A puzzle emerges when Phillips curves estimated over 1960-2007 are ussed to predice inflation over 2008-2010: inflation should have fallen by more than it did. We resolve this puzzle with two modifications of the Phillips curve, both suggested by theories of costly price adjustment: we measure core inflation with the median CPI inflation rate, and we allow the slope of the Phillips curve to change with the level and vairance of inflation. We then examine the hypothesis of anchored inflation expectations. We find that expectations have been fully "shock-anchored" since the 1980s, while "level anchoring" has been gradual and partial, but significant. It is not clear whether expectations are sufficiently anchored to prevent deflation over the next few years. Finally, we show that the Great Recession provides fresh evidence against the New Keynesian Phillips curve with rational expectations.
TL;DR: In this paper, a forward-looking monetary policy reaction function was used to compare the behavior of the European Central Bank and the Bank of England to a nonlinear Taylor rule and a linear Taylor rule.
TL;DR: The authors provides a selective survey of the incidence, causes, and consequences of a country's choice of its exchange rate regime, and provides an alternative overview of what the economics profession knows and needs to know about exchange rate regimes.
Abstract: This paper provides a selective survey of the incidence, causes, and consequences of a country's choice of its exchange rate regime. I begin with a critical review of Michael Klein and Jay C. Shambaugh's (2010) book Exchange Rate Regimes in the Modern Era, and then proceed to provide an alternative overview of what the economics profession knows and needs to know about exchange rate regimes. While a fixed exchange rate with capital mobility is a well-defined monetary regime, floating is not; thus, it is unclear whether it is theoretically sensible to compare countries across exchange rate regimes. This comparison is quite difficult to make empirically. It is often hard to figure out what the exchange rate regime of a country is in practice, since there are multiple conflicting regime classifications. More importantly, similar countries choose radically different exchange rate regimes without substantive consequences for macroeconomic outcomes like output growth and inflation. That is, the profession knows surprisingly little about either the causes or consequences of national choices of exchange rate regimes. But since the consequences of these choices are small, understanding their causes is of only academic interest. (JEL E52, F33)
TL;DR: In this paper, the authors used the Bank of Italy's Survey on Household Income and Wealth to find that most individuals lack knowledge of basic concepts such as interest rates and inflation, and that financial literacy has a positive and significant impact on the probability of pension plan participation.
Abstract: By requiring individuals to decide whether to participate in (newly established) pension funds, how much to contribute and how to invest their retirement wealth, pension reforms have raised concerns about the ability of households to deal with financial decisions. Using the Bank of Italy's Survey on Household Income and Wealth, our empirical analysis shows that most individuals lack knowledge of basic concepts such as interest rates and inflation. Males, the more educated and residents in the Centre-North possess higher literacy. As for the effects, financial literacy has a positive and significant impact on the probability of pension plan participation.
TL;DR: In this article, the authors investigated the sectoral welfare implications of the shift from the Great Inflation to the present regime of low and stable inflation and found that the benefits were significant for both sectors.
Abstract: Estimates of the welfare costs of inflation based on Bailey (1956) are typically computed using aggregate money demand models. Yet, the behavior of money demand may vary across sectors. Thus, the impact on welfare of inflation regime shifts may differ between households and firms. We specifically investigate the sectoral welfare implications of the shift from the Great Inflation to the present regime of low and stable inflation. For this purpose, we estimate different functional specifications of money demand for US households and non-financial firms using flow-of-fund data covering four decades. We find that the benefits were significant for both sectors.
TL;DR: This article showed that the failure to control for currency held by non-residents may lead to significantly overestimating the welfare costs for the domestic economy, thereby justifying a deviation from the Friedman rule in favor of the Fed's current policy.
Abstract: Empirical studies of the shoe-leather costs of inflation are typically computed using M1 as a measure of money. Yet, official data on M1 includes all currency issued, regardless of the country of residence of the holder. Using adjusted monetary data, we show that the failure to control for currency held by non residents may lead to significantly overestimating the welfare costs for the domestic economy. In particular, our estimates of shoe-leather costs are minimized for a positive but moderate value of the inflation rate, thereby justifying a deviation from the Friedman rule in favor of the Fed’s current policy.
TL;DR: In this paper, the authors examine the inflation targeting experiences of emerging market economies, focusing especially on the roles of the real exchange rate and the distinction between commodity and non-commodity exporting nations.
TL;DR: The authors assesses the impact of oil price changes on Spanish and euro area consumer price inflation and find that the inflationary effect of oil prices changes in both economies is limited, even though crude oil price fluctuations are a major driver of inflation variability.
TL;DR: In this article, the authors argue that people at the time must have been uncertain about fiscal policy's future course and lay out a theoretical framework for understanding the effects of fiscal uncertainties on monetary policy and show that fiscal variables have predictive value in dynamic models.
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TL;DR: In this paper, a two-sector structure with centralized and decentralized markets, stochastic trading opportunities, and bargaining is proposed to analyze the effects of money on capital formation. But the results differ from those in the reduced-form literature.
TL;DR: In this paper, the authors examined the short-run and long-run inflation hedging effectiveness of gold in the United States and Japan during the period of January 1971 to January 2010.
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TL;DR: This article examined the impact of key monetary policy variables, including long-term benchmark bank loan rate, money supply growth, and mortgage credit policy indicator, on the real estate price growth dynamics in China.
Abstract: Using quarterly data from 1998:Q1 to 2009:Q4 and monthly data from July 2005 to February 2010, this paper examines the impact of key monetary policy variables, including long-term benchmark bank loan rate, money supply growth, and mortgage credit policy indicator, on the real estate price growth dynamics in China. Empirical results consistently demonstrate that expansionary monetary policy tends to accelerate the subsequent home price growth, while restrictive monetary policy tends to decelerate the subsequent home price growth. These results suggest that Chinese monetary policy actions are the key driving forces behind the change of real estate price growth in China. We also show that hot money flow does not have significant impact on the change of home price growth after controlling for the money supply growth. Finally, a bullish stock market tends to accelerate subsequent home price growth.