Showing papers on "Inflation published in 2012"

Macroeconomic Effects of Federal Reserve Forward Guidance

Abstract: A large output gap accompanied by stable inflation close to its target calls for further monetary accommodation, but the zero lower bound on interest rates has robbed the Federal Open Market Committee (FOMC) of the usual tool for its provision. We examine how public statements of FOMC intentions—forward guidance—can substitute for lower rates at the zero bound. We distinguish between Odyssean forward guidance, which publicly commits the FOMC to a future action, and Delphic forward guidance, which merely forecasts macroeconomic performance and likely monetary policy actions. Others have shown how forward guidance that commits the central bank to keeping rates at zero for longer than conditions would otherwise warrant can provide monetary easing, if the public trusts it. We empirically characterize the responses of asset prices and private macroeconomic forecasts to FOMC forward guidance, both before and since the recent financial crisis. Our results show that the FOMC has extensive experience successfully telegraphing its intended adjustments to evolving conditions, so communication difficulties do not present an insurmountable barrier to Odyssean forward guidance. Using an estimated dynamic stochastic general equilibrium model, we investigate how pairing such guidance with bright-line rules for launching rate increases can mitigate risks to the Federal Reserve’s price stability mandate.

A Long-Run Risks Explanation of Predictability Puzzles in Bond and Currency Markets

Abstract: We show that bond risk-premia rise with uncertainty about expected inflation and fall with uncertainty about expected growth; the magnitude of return predictability using these two uncertainty measures is similar to that by multiple yields. Motivated by this evidence, we develop and estimate a long-run risks model with time-varying volatilities of expected growth and inflation. The model simultaneously accounts for bond return predictability and violations of uncovered interest parity in currency markets. We find that preference for early resolution of uncertainty, time-varying volatilities, and non-neutral effects of inflation on growth are important to account for these aspects of asset markets.

Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems

Abstract: Contents List Of Illustrations Preface Box: Definitions Introduction The Basics Of Modern Money Theory 1. The Basics Of Macroeconomic Accounting 1.1.The Basics Of Accounting For Stocks And Flows 1.2.MMT, Sectoral Balances, And Behavior 1.3. Stocks, Flows, And Balance Sheet: A Bathtub Analogy 1.4. Government Budget Deficits Are Largely Nondiscretionary: The Case Of The Great Recession Of 2007 1.5. Accounting For Real Versus Financial 1.6. Recent US Sectoral Balances: Goldilocks And The Global Crash 2. Spending By Issuer Of Domestic Currency 2.1. What Is A Sovereign Currency? 2.2. What Backs Up Currency And Why Would Anyone Accept It? 2.3. Taxes Drive Money 2.4. What If The Population Refuses To Accept The Domestic Currency? 2.5. Record Keeping In The The Money Of Account 2.6. Sovereign Currency And Monetizing Real Assets 2.7. Sustainability Conditions 3. The Domestic Monetary System: Banking And Central Banking 3.1. Ious Denominated In The National Currency 3.2. Clearing And The Pyramid Of Liabilities 3.3. Central Bank Operations In Crisis: Lender Of Last Resort 3.4. Balance Sheets Of Banks, Monetary Creation By Banks, And Interbank Settle-Ment 3.5. Exogenous Interest Rates And Quantitative Easing 3.6. The Technical Details Of Central Bank And Treasury Coordination: The Case Of The Fed 3.7. Treasury Debt Operations 3.8. Conclusions On Fed And Treasury Roles 4. Fiscal Operations In A Nation That Issues Its Own Currency 4.1. Introductory Principles 4.2. Effects Of Sovereign Government Budget Deficits On Saving, Reserves, And In-Terest Rates 4.3. Government Budget Deficits And The 'Two-Step' Process Of Saving 4.4. What If Foreigners Hold Government Bonds? 4.5. Currency Solvency And The Special Case Of The US Dollar 4.6. Sovereign Currency And Government Policy In The Open Economy 4.7. What About A Country That Adopts A Foreign Currency? 5. Tax Policy For Sovereign Nations 5.1. Why Do We Need Taxes? The MMT Perspective 5.2. What Are Taxes For? The MMT Approach 5.3. Taxes For Redistribution 5.4. Taxes And The Public Purpose 5.5. Tax Bads, Not Goods 5.6. Bad Taxes 6. Modern Money Theory And Alternative Exchange Rate Regimes 6.1.The Gold Standard And Fixed Exchange Rates 6.2. Floating Exchange Rates 6.3. Commodity Money Coins? Metalism Versus Nominalism, From Mesopotamia To Rome 6.4. Commodity Money Coins? Metalism Versus Nominalism, After Rome 6.5. Exchange Rate Regimes And Sovereign Defaults 6.6. The Euro: The Set-Up Of A Nonsovereign Currency 6.7. The Crisis Of The Euro 6.8. Endgame For The Euro? 6.9. Currency Regimes And Policy Space: Conclusion 7. Monetary And Fiscal Policy For Sovereign Currencies: What Should Government Do? 7.1. Just Because Government Can Afford To Spend Does Not Mean Government Ought To Spend 7.2. The 'Free' Market And The Public Purpose 7.3. Functional Finance 7.4. Functional Finance Versus The Government Budget Constraint 7.5. The Debate About Debt Limits (US Case) 7.6. A Budget Stance For Economic Stability And Growth 7.7. Functional Finance And Exchange Rate Regimes 7.8. Functional Finance And Developing Nations 7.9. Exports Are A Cost, Imports Are A Benefit: A Functional Finance Approach 8. Policy For Full Employment And Price Stability 8.1. Functional Finance And Full Employment 8.2. The JG/ELR For A Developing Nation 8.3. Program Manageability 8.4. The JG/ELR And Real World Experience 8.5. The JG And Inequality 8.6. Conclusions On Full Employment Policy 8.7. MMT For Austrians: Can A Libertarian Support The JG? 9. Inflation And Sovereign Currencies 9.1. Inflation And The Consumer Price Index 9.2. Alternative Explanations Of Hyperinflation 9.3. Real-World Hyperinflations 9.4. Conclusions On Hyperinflation 9.5. Conclusion: MMT And Policy 10. Conclusions: Modern Money Theory For Sovereign Currencies 10.1. MMT Got It Right: The Global Financial Crisis 10.2. MMT Got It Right: The Euro Crisis 10.3. Creastionism Versus Redemptionism: How A Money-Issuer Really Lends And Spends 10.4. Growing Recognition Of The Need For A Job Guarantee 10.5. MMT And External Constraints: To Fix Or To Float, That Is The Question 10.6. A Meme For Money Notes Bibliography Index

Macroeconomics and the Term Structure

Abstract: This paper provides an overview of the analysis of the term structure of interest rates with a special emphasis on recent developments at the intersection of macroeconomics and finance. The topic is important to investors and also to policymakers, who wish to extract macroeconomic expectations from longer-term interest rates, and take actions to influence those rates. The simplest model of the term structure is the expectations hypothesis, which posits that long-term interest rates are expectations of future aver- age short-term rates. In this paper, we show that many features of the configuration of interest rates are puzzling from the perspective of the expectations hypothesis. We review models that explain these anomalies using time-varying risk premia. Although the quest for the fundamental macroeconomic explanations of these risk premia is ongoing, inflation uncertainty seems to play a large role. Finally, while modern finance theory prices bonds and other assets in a single unified framework, we also consider an earlier approach based on segmented markets. Market segmentation seems important to understand the term structure of interest rates during the recent financial crisis. ( JEL E31, E43, E52, E58)

Forecasting inflation using dynamic model averaging

Abstract: We forecast quarterly US in‡ation based on the generalized Phillips curve using econometric methods which incorporate dynamic model averaging. These methods not only allow for coe¢ cients to change over time, but also allow for the entire forecasting model to change over time. We …nd that dynamic model averaging leads to substantial forecasting improvements over simple benchmark regressions and more sophisticated approaches such as those using time varying coe¢ cient models. We also provide evidence on which sets of predictors are relevant for forecasting in each period.

State of the art of inflation targeting

Abstract: Inflation targeting has been adopted by an increasing number of central banks as their monetary policy framework. At the start of 2010, some twenty seven central banks were considered fully fledged inflation targeters, and many others are in the process of establishing a full inflation-targeting framework. In this Handbook we publish details of the key features of the inflation-targeting frameworks in each of the 27 inflation targeting central banks around the world. These data enable us to analyse the state of the art of inflation targeting: the legal and institutional arrangements; the design of the inflation target; the decision-making body and process of decision-making; the models and forecasts used by central banks; the accountability mechanisms in place, and the communication and publication strategies. This handbook was written in June 2009 and updated in 2012.

Inflation and Economic Growth

Abstract: Data for around 100 countries from 1960 to 1990 are used to assess the effects of inflation on economic performance. If a number of country characteristics are held constant, then regression results indicate that the impact effects from an increase in average inflation by 10 percentage points per year are a reduction of the growth rate of real per capita GDP by 0.2-0.3 percentage points per year and a decrease in the ratio of investment to GDP by 0.4-0.6 percentage points. Since the statistical procedures use plausible instruments for inflation, there is some reason to believe that these relations reflect causal influences from inflation to growth and investment. However, statistically significant results emerge only when high-inflation experiences are included in the sample. Although the adverse influence of inflation on growth looks small, the long-term effects on standards of living are substantial. For example, a shift in monetary policy that raises the long-term average inflation rate by 10 percentage points per year is estimated to lower the level of real GDP after 30 years by 4-7%, more than enough to justify a strong interest in price stability.

Disagreement Among Forecasters in G7 Countries

Abstract: We investigate determinants of disagreement—cross-sectional dispersion of individual forecasts—about key economic indicators. Disagreement about economic activity, in particular about GDP growth, has a distinct dynamic from disagreement about prices: inflation and interest rates. Disagreement about GDP growth intensifies strongly during recessions. Disagreement about prices rises with their level, declines under independent central banks, and both its level and its sensitivity to macroeconomic variables are larger in countries where central banks became independent only around the mid-1990s. Our findings suggest that credible monetary policy contributes to anchoring of expectations about inflation and interest rates. Disagreement for both groups of indicators increases with uncertainty about the actual series.

Monetary and Macroprudential Policy Rules in a Model with House Price Booms

Abstract: Using a dynamic stochastic general equilibrium (DSGE) model with housing, this paper shows that strong monetary reactions to accelerator mechanisms that push up credit growth and house prices can help macroeconomic stability. In addition, using a macroprudential instrument specifically designed to dampen credit market cycles would also provide stabilization benefits when an economy faces financial sector or housing demand shocks. However, the optimal macroprudential rule under productivity shocks is to not intervene. Therefore, it is crucial to understand the source of house price booms for the design of monetary and macroprudential policy.

Imperfect Information, Real‐Time Data and Monetary Policy in the Euro Area

Abstract: An important concern for the European Central Bank (ECB), and all central banks alike, is the necessity of making decisions in real-time under conditions of great uncertainty about the underlying state of the economy. We address this concern by estimating on real-time data a New Keynesian model for the euro area under the assumption of imperfect information. In comparison to models that maintain the assumption of perfect information and are estimated on ex-post revised, we find that: (i) the estimated policy rule becomes more inertial and less aggressive towards inflation; (ii) the ECB faces a more severe trade-off in the stabilisation of inflation and the output gap.

Bank profitability and inflation: the case of China

Abstract: Purpose – The purpose of this paper is to evaluate the determinants of bank profitability in China. It examines the effects of inflation on bank profitability, while controlling for comprehensive bank‐specific and industry‐specific variables.Design/methodology/approach – The sample comprises a total of 101 banks (five state‐owned banks, 12 joint‐stock commercial banks and 84 city commercial banks). The period under consideration extends from 2003‐2009. The two step generalized methods of moments (GMM) estimators are applied.Findings – Empirical results exhibit that there is a positive relationship between bank profitability, cost efficiency, banking sector development, stock market development and inflation in China. The authors report that low profitability can be explained by higher volume of non‐traditional activity and higher taxation. Moreover, the authors confirm that there is a competitive environment in the Chinese banking industry. Furthermore, the authors propose policy actions that should be ta...

The Optimal Inflation Rate in New Keynesian Models: Should Central Banks Raise Their Inflation Targets in Light of the Zero Lower Bound?

Abstract: We study the effects of positive steady-state inflation in New Keynesian models subject to the zero bound on interest rates. We derive the utility-based welfare loss function taking into account the effects of positive steady-state inflation and solve for the optimal level of inflation in the model. For plausible calibrations with costly but infrequent episodes at the zero-lower bound, the optimal inflation rate is low, typically less than two percent, even after considering a variety of extensions, including optimal stabilization policy, price indexation, endogenous and statedependent price stickiness, capital formation, model-uncertainty, and downward nominal wage rigidities. On the normative side, price level targeting delivers large welfare gains and a very low optimal inflation rate consistent with price stability. These results suggest that raising the inflation target is too blunt an instrument to efficiently reduce the severe costs of zero-bound episodes.

Assessing the Economy‐wide Effects of Quantitative Easing

Abstract: This article examines the macroeconomic impact of the first round of quantitative easing (QE) by the Bank of England. We attempt to quantify the effects of these purchases by focusing on the impact of lower long-term interest rates on the wider economy. We use three different models to estimate the impact of QE on output and inflation: a large Bayesian vector autoregression (VAR), a change-point structural VAR and a time-varying parameter VAR. Our estimates suggest that QE may have had a peak effect on the level of real GDP of around and a peak effect on annual CPI inflation of about % points.

Slow Passthrough Around the World: A New Import for Developing Countries?

Abstract: Developing countries traditionally experience pass-through of exchange rate changes that is greater and more rapid than high-income countries experience. This is true equally of the determination of prices of imported goods, prices of local competitors’ products, and the general CPI. But developing countries in the 1990s experienced a rapid downward trend in the degree of pass-through and speed of adjustment, more so than did high-income countries. As a consequence, slow and incomplete pass-through is no longer exclusively a luxury of industrial countries. Using a new data set—prices of eight narrowly defined brand commodities, observed in 76 countries—we find empirical support for some of the factors that have been hypothesized in the literature, but not for others. Significant determinants of the pass-through coefficient include per capita incomes, bilateral distance, tariffs, country size, wages, long-term inflation, and long-term exchange rate variability. Some of these factors changed during the 1990s. Part (and only part) of the downward trend in pass-through to imported goods prices, and in turn to competitors’ prices and the CPI, can be explained by changes in the monetary environment—including a fall in long-term inflation. Real wages work to reduce pass-through to competitors’ prices and the CPI, confirming the hypothesized role of distribution and retail costs in pricing to market. Rising distribution costs, due perhaps to the Balassa-Samuelson-Baumol effect, could contribute to the decline in the pass-through coefficient in some developing countries.

Price setting in the euro area: some stylised facts from individual producer price data

Abstract: This paper documents patterns of price setting at the retail level in the euro area. A set of stylized facts on the frequency and size of price changes is presented along with an econometric investigation of their main determinants. Price adjustment in the euro area can be summarized in six stylized facts. First, prices of most products change rarely. The average monthly frequency of price adjustment is 15 p.c., compared to about 25 p.c. in the US. Second, the frequency of price changes is characterized by substantial cross-product heterogeneity and pronounced sectoral patterns: prices of oil-related) energy and unprocessed food products change very often, while price adjustments are less frequent for processed food products, non-energy industrial goods and services. Third, cross-country heterogeneity exists but is less pronounced. Fourth, price decreases are not uncommon. Fifth, price increases and decreases are sizeable compared to aggregate and sectoral inflation rates. Sixth, price changes are not highly synchronized across price-setters. Moreover, the frequency of price changes in the euro area is related to a number of factors, in particular seasonality, outlet type, indirect taxation, use of attractive prices as well as aggregate or product-specific inflation.

Macroprudential Policies and Housing Prices-A New Database and Empirical Evidence for Central, Eastern, and Southeastern Europe

Abstract: Several countries in Central, Eastern and Southeastern Europe used a rich set of prudential instruments in response to last decade’s credit and housing boom and bust cycles. We collect detailed information on these policy measures in a comprehensive database covering 16 countries at a quarterly frequency. We use this database to investigate whether the policy measures had an impact on housing price inflation. Our evidence suggests that some—but not all—measures did have an impact. These measures were changes in the minimum CAR and non-standard liquidity measures (marginal reserve requirements on foreign funding, marginal reserve requirements linked to credit growth).

Observational tests of inflation with a field derivative coupling to gravity

Abstract: A field kinetic coupling with the Einstein tensor leads to a gravitationally enhanced friction during inflation, by which even steep potentials with theoretically natural model parameters can drive cosmic acceleration. In the presence of this nonminimal derivative coupling, we place observational constraints on a number of representative inflationary models such as chaotic inflation, inflation with exponential potentials, natural inflation, and hybrid inflation. We show that most of the models can be made compatible with the current observational data mainly due to the suppressed tensor-to-scalar ratio.

A Structural Model for the Housing and Credit Markets in Italy

Abstract: We estimate a fully-fledged structural system for the housing market in Italy, taking into account the multi-fold link with bank lending to both households and construction firms. The model allows the house supply to vary in the short run and the banking sector to affect the equilibrium in the housing market, through its effect on housing supply and demand. We show that house prices react mostly to standard drivers such as disposable income, expected inflation and demographic pressures. Lending conditions also have a significant impact, especially through their effects on mortgage loans, and consequently on housing demand. Allowing short-run adjustment in house supply implies a weaker response of house prices to a change in the monetary stance or in banks’ deleveraging process. Finally, we find that since the mid-eighties house price developments in Italy have been broadly in line with the fundamentals; during the recent financial crisis, the worsening in credit supply conditions dampened house price dynamics, partly offsetting the positive stimulus provided by the easing of the monetary policy stance.

Real Term Structure and Inflation Compensation in the Euro Area

Abstract: Estimates of the real term structure for the euro area implied by French index-linked bonds are obtained by means of a smoothing spline methodology. The real term structure allows computation of the constant-maturity inflation compensation, which is compared with the surveyed inflation expectations in order to obtain a rough measure of the inflation risk premium. The comparison between the inflation compensation and the inflation swap shows that the two variables are closely interlinked but differently affected by illiquidity during periods of stress. The methodology used in this paper is quite effective at capturing the general shape of the real term structure while smoothing through idiosyncratic variations in the yields of index-linked bonds. Real interest rates tend to be quite stable at longer horizons and the average 10-year real rate from 2002 to 2009 is close to 2 percent. Furthermore, evidence is found that inflation compensation was held down in the period 2008-09 by an increase in the liquidity premium of index-linked bonds.

A comparative analysis of alternative univariate time series models in forecasting Turkish inflation

Abstract: This paper analyses inflation forecasting power of artificial neural networks with alternative univariate time series models for Turkey. The forecasting accuracy of the models is compared in terms of both static and dynamic forecasts for the period between 1982:1 and 2009:12. We find that at earlier forecast horizons conventional models, especially ARFIMA and ARIMA, provide better one-step ahead forecasting performance. However, unobserved components model turns out to be the best performer in terms of dynamic forecasts. The superiority of the unobserved components model suggests that inflation in Turkey has time varying pattern and conventional models are not able to track underlying trend of inflation in the long run.

Interest Rate Setting by the ECB, 1999-2006: Words and Deeds

Abstract: We estimate empirical reaction functions for the European Central Bank (ECB) with ordered-probit techniques, using the ECB's Monthly Bulletin to guide the choice of variables. The results show that policy reacts to the state of the real economy, M3 growth, and exchange rate changes but not to inflation. We develop quantitative indicators of the Governing Council's assessment of economic conditions to understand its interest rate decisions and argue that the ECB has not reacted to inflation shocks because they were seen as temporary. By contrast, policy responses to economic activity are strong because it impacts on the outlook for inflation.

Macroeconomics Beyond the NAIRU

Abstract: Economists and the governments they advise have based their macroeconomic policies on the idea of a natural rate of unemployment. Government policy that pushes the rate below this point--about 6 percent--is apt to trigger an accelerating rate of inflation that is hard to reverse, or so the argument goes. In this book, Storm and Naastepad make a strong case that this concept is flawed: that a stable non-accelerating inflation rate of unemployment (NAIRU), independent of macroeconomic policy, does not exist. Consequently, government decisions based on the NAIRU are not only misguided but have huge and avoidable social costs, namely, high unemployment and sustained inequality. Skillfully merging theoretical and empirical analysis, Storm and Naastepad show how the NAIRU's neglect of labor's impact on technological change and productivity growth eclipses the many positive contributions that labor and its regulation make to economic performance. When these positive effects are taken into account, the authors contend, a more humane policy becomes feasible, one that would enhance productivity and technological progress while maintaining profits, thus creating conditions for low unemployment and wider equality.

Reserve Requirements for Price and Financial Stability - When are They Effective?

Abstract: Reserve requirements are a prominent policy instrument in many emerging countries. The present study investigates the circumstances under which reserve requirements are an appropriate policy tool for price or financial stability. We consider a small open economy model with sticky prices, financial frictions and a banking sector that is subject to legal reserve requirements and compute optimal interest rate and reserve requirement rules. Overall, our results indicate that reserve requirements can support the price stability objective only if financial frictions are important and lead to substantial improvements if there is a financial stability objective. Contrary to a conventional interest rate policy, reserve requirements become more effective when there is foreign currency debt.

Generalized Higgs inflation

Abstract: We study Higgs inflation in the context of generalized G-inflation, i.e. the most general single-field inflation model with second-order field equations. The four variants of Higgs inflation proposed so far in the literature can be accommodated at one time in our framework. We also propose yet another class of Higgs inflation, the running Einstein inflation model, that can naturally arise from the generalized G-inflation framework. As a result, five Higgs inflation models in all should be discussed on an equal footing. Concise formulas for primordial fluctuations in these generalized Higgs inflation models are provided, which will be helpful to determine which model is favored from the future experiments and observations such as the Large Hadron Collider and the Planck satellite.

Real-Time Inflation Forecasting in a Changing World

Abstract: This paper revisits the accuracy of inflation forecasting using activity and expectations variables. We apply Bayesian model averaging across different regression specifications selected from a set of potential predictors that includes lagged values of inflation, a host of real activity data, term structure data, nominal data and surveys. In this model average we can entertain different channels of structural instability, either by incorporating stochastic breaks in the regression parameters of each individual specification within this average, allowing for breaks in the error variance of the overall model average, or both. Thus, our framework simultaneously addresses structural change and model uncertainty that would unavoidably affect any inflation forecast model. The different versions of our framework are used to model U.S. PCE deflator and GDP deflator inflation rates for the 1960-2011 period. A real-time inflation forecast evaluation shows that averaging over many predictors in a model that at least allows for structural breaks in the error variance results in very accurate point and density forecasts, especially for the post-1984 period. Our framework is especially useful when forecasting, in real-time, the likelihood of lower-than-usual inflation rates over the medium term.