Showing papers on "Inflation published in 2013"

Measuring Economic Policy Uncertainty

Abstract: Many commentators argue that uncertainty about tax, spending, monetary and regulatory policy slowed the recovery from the 2007-2009 recession. To investigate this we develop a new index of economic policy uncertainty (EPU), built on three components: the frequency of newspaper references to economic policy uncertainty, the number of federal tax code provisions set to expire, and the extent of forecaster disagreement over future inflation and government purchases. This EPU index spikes near consequential presidential elections and major events such as the Gulf wars and the 9/11 attack. It also rises steeply from 2008 onward. We then evaluate our EPU index, first on a sample of 3,500 human audited news articles, and second against other measures of policy uncertainty, with these suggesting our EPU index is a good proxy for actual economic policy uncertainty. Drilling down into our index we find that the post-2008 increase was driven mainly by tax, spending and healthcare policy uncertainty. Finally, VAR estimates show that an innovation in policy uncertainty equal to the increase from 2006 to 2011 foreshadows declines of up to 2.3% in GDP and 2.3 million in employment.

High Frequency Identification of Monetary Non-Neutrality: The Information Effect

Abstract: We present estimates of monetary non-neutrality based on evidence from high-frequency responses of real interest rates, expected inflation, and expected output growth Our identifying assumption is that unexpected changes in interest rates in a 30-minute window surrounding scheduled Federal Reserve announcements arise from news about monetary policy In response to an interest rate hike, nominal and real interest rates increase roughly one-for-one, several years out into the term structure, while the response of expected inflation is small At the same time, forecasts about output growth also increase|the opposite of what standard models imply about a monetary tightening To explain these facts, we build a model in which Fed announcements affect beliefs not only about monetary policy but also about other economic fundamentals Our model implies that these information effects play an important role in the overall causal effect of monetary policy shocks on output

Inflation and growth: new evidence from a dynamic panel threshold analysis

Abstract: We introduce a dynamic panel threshold model to estimate inflation thresholds for long-term economic growth. Advancing on Hansen (J Econom 93:345–368, 1999) and Caner and Hansen (Econom Theory 20:813–843, 2004), our model allows the estimation of threshold effects with panel data even in case of endogenous regressors. The empirical analysis is based on a large panel-dataset including 124 countries. For industrialized countries, our results confirm the inflation targets of about 2% set by many central banks. For non-industrialized countries, we estimate that inflation rates exceeding 17% are associated with lower economic growth. Below this threshold, however, the correlation remains insignificant.

Macroeconomic forecasting and structural change

Abstract: The aim of this paper is to assess whether explicitly modeling structural change increases the accuracy of macroeconomic forecasts. We produce real time out-of-sample forecasts for inflation, the unemployment rate and the interest rate using a Time-Varying Coefficients VAR with Stochastic Volatility (TV-VAR) for the US. The model generates accurate predictions for the three variables. In particular for inflation the TV-VAR outperforms, in terms of mean square forecast error, all the competing models: fixed coefficients VARs, Time-Varying ARs and the na¨ove random walk model. These results are also shown to hold over the period commonly referred to as the ”Great Moderation”.

Time-Varying Effects of Oil Supply Shocks on the US Economy

Abstract: We investigate how the dynamic eects of oil supply shocks on the US economy have changed over time. We …rst document a remarkable structural change in the oil market itself, i.e. a considerably steeper, hence, less elastic oil demand curve since the mid-eighties. Accordingly, a typical oil supply shock is currently characterized by a much smaller impact on world oil production and a greater eect on the real price of crude oil, but has a similar impact on US output and in‡ation as in the 1970s. Second, we …nd a smaller role for oil supply shocks in accounting for real oil price variability over time, implying that current oil price ‡uctuations are more demand driven. Finally, while unfavorable oil supply disturbances explain little of the "Great In‡ation", they seem to have contributed to the 1974/75, early 1980s and 1990s recessions but also dampened the economic boom at the end of the millennium.

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 uncertainty measures is similar to that by multiple yields Motivated by this evidence, we develop and estimate a long-run risks model with timevarying 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 The Author 2012 Published by Oxford University Press on behalf of The Society for Financial Studies All rights reserved For Permissions, please e-mail: journalspermissions@oupcom, Oxford University Press

WHY ARE THE 2000s SO DIFFERENT FROM THE 1970s? A STRUCTURAL INTERPRETATION OF CHANGES IN THE MACROECONOMIC EFFECTS OF OIL PRICES

Abstract: In the 1970s, large increases in the price of oil were associated with sharp decreases in output and large increases in inflation. In the 2000s, even larger increases in the price of oil were associated with much milder movements in output and inflation. Using a structural VAR approach, Blanchard and Gali (in J. Gali and M. Gertler (eds.) 2009, International Dimensions of Monetary Policy, University of Chicago Press, pp. 373–428) argued that this reflected a change in the causal relation from the price of oil to output and inflation. They then argued that this change could be due to a combination of three factors: a smaller share of oil in production and consumption, lower real wage rigidity, and better monetary policy. Their argument, based on simulations of a simple new-Keynesian model, was informal. Our purpose in this paper is to take the next step, and to estimate the explanatory power and contribution of each of these factors. To do so, we use a minimum distance estimator that minimizes, over the set of structural parameters and for each of two samples (pre- and post-1984), the distance between the empirical SVAR-based impulse response functions and those implied by a new-Keynesian model. Our empirical results point to an important role for all three factors.

How Much Do Investors Care About Macroeconomic Risk? Evidence from Scheduled Economic Announcements

Abstract: Stock market average returns and Sharpe ratios are significantly higher on days when important macroeconomic news about inflation, unemployment, or interest rates is scheduled for announcement. The average announcement day excess return from 1958 to 2009 is 11.4 basis points versus 1.1 basis points for all the other days, suggesting that over 60% of the cumulative annual equity risk premium is earned on announcement days. The Sharpe ratio is ten times higher. In contrast, the risk-free rate is detectably lower on announcement days, consistent with a precautionary saving motive. Our results demonstrate a trade-off between macroeconomic risk and asset returns, and provide an estimate of the premium investors demand to bear this risk.

Non-Performing Loans in CESEE; Determinants and Impact on Macroeconomic Performance

Abstract: The paper investigates the non-performing loans (NPLs) in Central, Eastern and South-Eastern Europe (CESEE) in the period of 1998–2011 The paper finds that the level of NPLs can be attributed to both macroeconomic conditions and banks’ specific factors, though the latter set of factors was found to have a relatively low explanatory power The examination of the feedback effects broadly confirms the strong macro-financial linkages in the region While NPLs were found to respond to macroeconomic conditions, such as GDP growth, unemployment, and inflation, the analysis also indicates that there are strong feedback effects from the banking system to the real economy, thus suggesting that the high NPLs that many CESEE countries currently face adversely affect the pace economic recovery

Growth Slowdowns Redux: New Evidence on the Middle-Income Trap

Abstract: We analyze the incidence and correlates of growth slowdowns in fast-growing middle-income countries, extending the analysis of an earlier paper (Eichengreen, Park and Shin 2012). We continue to find dispersion in the per capita income at which slowdowns occur. But in contrast to our earlier analysis which pointed to the existence of a single mode at which slowdowns occur in the neighborhood of $15,000-$16,000 2005 purchasing power parity dollars, new data point to two modes, one in the $10,000-$11,000 range and another at $15,000-$16,0000. A number of countries appear to have experienced two slowdowns, consistent with the existence of multiple modes. We conclude that high growth in middle-income countries may decelerate in steps rather than at a single point in time. This implies that a larger group of countries is at risk of a growth slowdown and that middle-income countries may find themselves slowing down at lower income levels than implied by our earlier estimates. We also find that slowdowns are less likely in countries where the population has a relatively high level of secondary and tertiary education and where high-technology products account for a relatively large share of exports, consistent with our earlier emphasis of the importance of moving up the technology ladder in order to avoid the middle-income trap.

Chapter 1 – Forecasting Inflation

Abstract: This chapter discusses recent developments in inflation forecasting. We perform a horse-race among a large set of traditional and recently developed forecasting methods, and discuss a number of principles that emerge from this exercise. We find that judgmental survey forecasts outperform model-based ones, often by a wide margin. A very simple forecast that is just a glide path between the survey assessment of inflation in the current-quarter and the long-run survey forecast value turns out to be competitive with the actual survey forecast and thereby does about as well or better than model-based forecasts. We explore the strengths and weaknesses of some specific prediction methods, including forecasts based on the Phillips curve and based on dynamic stochastic general equilibrium models, in greater detail. We also consider measures of inflation expectations taken from financial markets and the tradeoff between forecasting aggregates and disaggregates.

The Phillips Curve is Alive and Well: Inflation and the NAIRU During the Slow Recovery

Abstract: The Phillips Curve (hereafter PC) is widely viewed as dead, destined to the mortuary scrapyard of discarded economic ideas. The coroner's evidence consists of the small standard deviation of the core inflation rate in the past two decades despite substantial volatility of the unemployment rate, and in particular the common tendency of PC inflation equations to predict ever greater amounts of negative inflation (i.e., deflation) over the years of labor-market slack since 2008, sometimes called "the case of the missing deflation". The apparent failure of the PC deprives the Fed of a means of estimating the natural rate of unemployment (or NAIRU), and thus the Fed is steering the economy in a fog with no navigational device to determine the size of the unemployment gap, one of the two primary goals of its "dual mandate." The results of this paper contain important new information for Fed policymakers, for Fed-watchers, and almost everyone else in the community of policy-makers and practitioners of applied macro. The greatest failure in the history of the PC occurred not within the past five years but rather in the mid-1970s, when the predicted negative relation between inflation and unemployment turned out to be utterly wrong. Instead inflation exhibited a strong positive correlation with unemployment. Failure bred success, as a revolution in thinking rebuilt macroeconomics to be not just about demand, but also about supply. By 1980 diagrams of shifting demand and supply curves had appeared in most macroeconomics textbooks. An econometric model of the inflation rate developed in 1982, soon dubbed the "triangle model", incorporated explicit variables for supply shifts and has successfully tracked inflation behavior since then. The triangle model shows that the puzzle of missing deflation is in fact no puzzle. It can estimate coefficients up to 1996 and then in a 16-year-long dynamic simulation, with no information on the actual values of lagged inflation, predict the 2013:Q1 value of inflation to within 0.50 of a percentage point. The slope of the PC relationship between inflation and unemployment does not decline by half or more, as in the recent literature, but instead is stable. The model's simulation success is furthered here by recognizing the greater impact on inflation of short-run unemployment (spells of 26 weeks or less) than of long-run unemployment. The implied NAIRU for the total unemployment rate has risen since 2007 from 4.8 to 6.5 percent, raising new challenges for the Fed's ability to carry out its dual mandate.

Regime switches, Agents’ Beliefs, and Post-World War II U.S. Macroeconomic Dynamics

Abstract: The evolution of inflation and output over the last 50 years is examined through the lens of a micro-founded model that allows for changes in the behavior of the Federal Reserve and in the volatility of structural shocks. Agents are aware of the possibility of regime changes and their beliefs have an impact on the law of motion underlying the macroeconomy. The results support the view that there were regime switches in the conduct of monetary policy. However, the behavior of the Federal Reserve is identified by repeated fluctuations between a Hawk- and a Dove- regime, instead of by the traditional pre- and post- Volcker structure. Counterfactual simulations show that if agents had anticipated the appointment of an extremely conservative Chairman, inflation would not have reached the peaks of the late `70s and the inflation-output trade-off would have been less severe. These "beliefs counterfactuals" are new in the literature. Finally, the paper provides a Bayesian algorithm to handle the technical difficulties that arise in a rational expectations model with Markov-switching regimes.

Bias in the Consumer Price Index: What is the Evidence?

Abstract: Recent research has suggested that the upward bias of the US consumer price index may be significant, and correcting the biases would have important long-run effects on the federal budget deficit The author describes the sampling procedures used in constructing the consumer price index, and gives simple examples of formula bias and quality adjustment He then reviews the empirical evidence, attempting to show which biases are reliably estimated and which estimates of bias are based on extrapolation and guesswork The author discusses possibilities for further research leading to potential improvements in the consumer price index

Real-Time Inflation Forecasting in a Changing World

Abstract: This article 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, (relative) price data, and surveys. In this model average, we can entertain different channels of structural instability, by either incorporating stochastic breaks in the regression parameters of each individual specification within this average, or 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. personal consumption expenditures (PCE) deflator and gross domestic product (GDP) deflator inflation rates for the 1960–2011 period. A real-time inflation forecast ...

Aggregate Supply in the United States: Recent Developments and Implications for the Conduct of Monetary Policy

Abstract: The recent financial crisis and ensuing recession appear to have put the productive capacity of the economy on a lower and shallower trajectory than the one that seemed to be in place prior to 2007. Using a version of an unobserved components model introduced by Fleischman and Roberts, we estimate that potential GDP in late 2014 was about 7 percent below the trajectory it appeared to be on prior to 2007. We argue that a significant portion of the recent damage to the supply side of the economy plausibly was endogenous to the weakness in aggregate demand. Endogeneity of supply with respect to demand provides a strong motivation for a vigorous policy response to a weakening in aggregate demand, and we present optimal-control simulations showing how monetary policy might respond to such endogeneity in the absence of other considerations. We then discuss how other considerations—such as increased risks of financial instability or inflation instability—could cause policymakers to exercise restraint in their response to cyclical weakness.

Commodity Prices, Convenience Yields, and Inflation

Abstract: This paper provides evidence that the two leading principal components in a panel of 23 commodity convenience yields have statistically and quantitatively important predictive power for inflation even after controlling for unemployment gap and oil prices. The results hold up in out-of-sample forecasts, across forecast horizons, and across G7 countries. The convenience yields also explain commodity prices and can be seen as informational variables about future economic conditions as conveyed by the futures markets. A bootstrap procedure for conducting inference when the principal components are used as regressors is also proposed.

What ties return volatilities to price valuations and fundamentals

Abstract: Stock and Treasury bond comovement, volatilities, and their relations to their price valuations and fundamentals change stochastically over time, in both magnitude and direction. These stochastic changes are explained by a general equilibrium model in which agents learn about composite economic and inflation regimes. We estimate our model using both fundamentals and asset prices and find that inflation news signal either positive or negative future real economic growth depending on the times, thereby affecting the direction of stock-bond comovement. The learning dynamics generate strong nonlinearities between volatilities and price valuations. We find empirical support for numerous predictions of the model.

What does the yield curve tell us about exchange rate predictability

Abstract: Since the term structure of interest rates embodies information about future economic activity, we extract relative Nelson-Siegel (1987) factors from cross-country yield curve differences to proxy expected movements in future exchange rate fundamentals. Using monthly data for the United Kingdom, Canada, Japan, and the United States, we show that the yield curve factors predict exchange rate movements and explain excess currency returns one month to two years ahead. Our results provide support for the asset pricing formulation of exchange rate determination and offer an intuitive explanation to the uncovered interest parity puzzle by relating currency risk premiums to inflation and business cycle risks.

Bankers, Bureaucrats, and Central Bank Politics: The Myth of Neutrality

Abstract: 1. Agents, institutions, and the political economy of performance 2. Career theories of monetary policy 3. Careers and inflation in industrial democracies 4. Careers and the monetary policy process 5. Careers and inflation in developing countries 6. The uses of autonomy: what independence really means 7. Partisan governments, labor unions, and monetary policy 8. The politics of central banker appointment 9. The politics of central banker tenure 10. Conclusion: the dilemma of discretion.

Financial Literacy and Financial Planning in France

Abstract: We study financial literacy in France using the PATER survey and following the Lusardi and Mitchell (2011c) approach. We find that some subpopulations are less financially literate than others: women, young and old people as well as less-educated people are more likely to face difficulties when dealing with fundamental financial concepts such as risk diversification and inflation and interest compounding. We also find some differences in financial knowledge depending on the political opinion of the respondents. Finally we show that these differences in financial knowledge are correlated with differences in the propensity to plan: people who score higher on the financial literacy questions are more likely to be engaged in the preparation of a clearly defined financial plan.

Interest Rate Rules and Macroeconomic Stability under Heterogeneous Expectations

Abstract: The recent macroeconomic literature stresses the importance of managing heterogeneous expectations in the formulation of monetary policy. We use a simple frictionless dynamic stochastic general equilibrium (DSGE) model to investigate inflation dynamics under alternative interest rate rules when agents have heterogeneous expectations, and update their beliefs based on past performance, as in Brock and Hommes [Econometrica 65(5), 1059-1095 (1997)]. The stabilizing effect of different monetary policies depends on the ecology of forecasting rules (i.e., the composition of the set of predictors), on agents' sensitivity to differences in forecasting performance, and on how aggressively the monetary authority sets the nominal interest rate in response to inflation. In particular, if the monetary authority responds only weakly to inflation, a cumulative process with rising inflation is likely. On the other hand, a Taylor interest rate rule that sets the interest rate more than point for point in response to inflation stabilizes inflation dynamics, but does not always lead the system to converge to the rational expectations equilibrium, as multiple equilibria may persist.