Showing papers on "Inflation published in 2015"
1,310 citations
TL;DR: In this paper, the authors provide evidence on the transmission of monetary policy shocks in a setting with both economic and financial variables, and show that shocks identified using high frequency surprises around policy announcements as external instruments produce responses in output and inflation that are typical in monetary VAR analysis.
Abstract: We provide evidence on the transmission of monetary policy shocks in a setting with both economic and financial variables. We first show that shocks identified using high frequency surprises around policy announcements as external instruments produce responses in output and inflation that are typical in monetary VAR analysis. We also find, however, that the resulting "modest" movements in short rates lead to "large" movements in credit costs, which are due mainly to the reaction of both term premia and credit spreads. Finally, we show that forward guidance is important to the overall strength of policy transmission. (JEL E31, E32, E43, E44, E52, G01)
1,044 citations
TL;DR: The authors proposed a new explanation for the absence of disinflation during the Great Recession and found popular explanations to be insufficient, and proposed an explanation for this puzzle within the context of a standard Phillips curve.
Abstract: We evaluate explanations for the absence of disinflation during the Great Recession and find popular explanations to be insufficient. We propose a new explanation for this puzzle within the context of a standard Phillips curve. If firms’ inflation expectations track those of households, then the missing disinflation can be explained by the rise in their inflation expectations between 2009 and 2011. We present new econometric and survey evidence consistent with firms having similar expectations as households. The rise in household inflation expectations from 2009 to 2011 can be explained by the increase in oil prices over this time period. (JEL D84, E24, E32, E52, E58, Q35)
559 citations
TL;DR: This article proposed a new approach to test the full-information rational expectations hypothesis which can identify whether rejections of the null arise from irrationality or limited information, and quantified the economic significance of departures from the null by quantifying the underlying degree of information rigidity.
Abstract: We propose a new approach to test the full-information rational expectations hypothesis which can identify whether rejections of the null arise from irrationality or limited information This approach quantifies the economic significance of departures from the null by quantifying the underlying degree of information rigidity Applying this approach to US and international data of professional forecasters and other agents yields pervasive evidence consistent with models of imperfect information Furthermore, the proposed approach sheds new light on policies, such as inflation-targeting and those leading to the Great Moderation, affecting expectations Finally, we document evidence of state-dependence in the expectations formation process
469 citations
TL;DR: In this article, the authors explore two issues triggered by the global financial crisis and find that a high proportion of them have been followed by lower output or even lower growth, suggesting a breakdown of the relation between inflation and activity.
Abstract: We explore two issues triggered by the global financial crisis. First, in most advanced countries, output remains far below the pre-recession trend, suggesting hysteresis. Second, while inflation has decreased, it has decreased less than anticipated, suggesting a breakdown of the relation between inflation and activity. To examine the first, we look at 122 recessions over the past 50 years in 23 countries. We find that a high proportion of them have been followed by lower output or even lower growth. To examine the second, we estimate a Phillips curve relation over the past 50 years for 20 countries. We find that the effect of unemployment on inflation, for given expected inflation, decreased until the early 1990s but has remained roughly stable since then. We draw implications of our findings for monetary policy.
262 citations
TL;DR: The authors analyzed the effect of changes in firms' financial conditions on their price-setting behavior during the "Great Recession" that surrounded the financial crisis, finding that firms with weak balance sheets increased prices significantly relative to industry averages, whereas firms with strong balance sheets lowered prices.
Abstract: Using confidential product-level price data underlying the U.S. Producer Price Index (PPI), this paper analyzes the effect of changes in firms’ financial conditions on their price-setting behavior during the ”Great Recession” that surrounds the financial crisis. The evidence indicates that during the height of the crisis in late 2008, firms with “weak” balance sheets increased prices significantly relative to industry averages, whereas firms with “strong” balance sheets lowered prices, a response consistent with an adverse demand shock. These stark differences in price-setting behavior are consistent with the notion that financial frictions may significantly influence the response of aggregate inflation to macroeconomic shocks. We explore the implications of these empirical findings within a general equilibrium framework that allows for customer markets and departures from the frictionless financial markets. In the model, firms have an incentive to set a low price to invest in market share, though when financial distortions are severe, firms forgo these investment opportunities and maintain high prices in an effort to preserve their balance-sheet capacity. Consistent with our empirical findings, the model with financial distortions—relative to the baseline model without such distortions—implies a substantial attenuation of price dynamics in response to contractionary demand shocks.
260 citations
TL;DR: In this paper, the authors define and provide empirical evidence for an International Price System (IPS) in global trade employing data for thirty-five developed and developing countries, characterized by two features: the overwhelming share of world trade is invoiced in very few currencies, with the dollar the dominant currency.
Abstract: I define and provide empirical evidence for an “International Price System” in global trade employing data for thirty-five developed and developing countries. This price system is characterized by two features. First, the overwhelming share of world trade is invoiced in very few currencies, with the dollar the dominant currency. Second, international prices, in their currency of invoicing, are not very sensitive to exchange rates at horizons of up to two years. In this system, a good proxy for a country's inflation sensitivity to exchange rate fluctuations is the fraction of its imports invoiced in a foreign currency. U.S. inflation is consequently more insulated from exchange rate shocks, while other countries are highly sensitive to it. Exchange rate depreciations (appreciations) make U.S. exports cheaper (expensive), while for other countries they mainly raise (lower) mark-ups and hence profits. U.S. monetary policy has spillover effects on inflation in other countries, while spillovers from other countries monetary policies on to U.S. inflation are more muted.
260 citations
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 for equilibrium mortgage rates given borrower characteristics and optimal decisions, and quantifies the effects of adjustable versus fixed mortgage rates, loan-to-value ratios, and mortgage affordability measures on mortgage premia and default.
Abstract: In this paper, we solve a dynamic model of households' mortgage decisions incorporating labor income, house price, inflation, and interest rate risk. Using a zero-profit condition for mortgage lenders, we solve for equilibrium mortgage rates given borrower characteristics and optimal decisions. The model quantifies the effects of adjustable versus fixed mortgage rates, loan-to-value ratios, and mortgage affordability measures on mortgage premia and default. Mortgage selection by heterogeneous borrowers helps explain the higher default rates on adjustable-rate mortgages during the recent U.S. housing downturn, and the variation in mortgage premia with the level of interest rates.
195 citations
TL;DR: A review of the literature on gold as an investment can be found in the special issue of the International Review of Financial Analysis (IRFA) as discussed by the authors, with an editorial introduction.
191 citations
TL;DR: The authors examined the relationship between expected inflation and spending attitudes using the microdata from the Michigan Survey of Consumers and found that the impact of higher inflation expectations on the reported readiness to spend on durables is generally small, outside the zero lower bound, often statistically insignificant, and inside of it typically significantly negative.
Abstract: There have been suggestions for monetary policy to engineer higher inflation expectations to stimulate spending. We examine the relationship between expected inflation and spending attitudes using the microdata from the Michigan Survey of Consumers. The impact of higher inflation expectations on the reported readiness to spend on durables is generally small, outside the zero lower bound, often statistically insignificant, and inside of it typically significantly negative. In our baseline specification, a one percentage point increase in expected inflation during the recent zero lower bound period reduces households’ probability of having a positive attitude towards spending by about 0.5 percentage points. (JEL D12, D84, E21, E31, E52)
184 citations
TL;DR: This article found that despite 25 years of inflation targeting by the Reserve Bank of New Zealand, firm managers display little anchoring of such expectations, and their forecasts of future inflation reflect high levels of uncertainty and are extremely dispersed.
Abstract: Using a new survey of firm managers, we investigate whether inflation expectations in New Zealand are anchored or not. In spite of 25 years of inflation targeting by the Reserve Bank of New Zealand, firm managers display little anchoring of such expectations. We document this finding along a number of dimensions. Managers are unaware of the identities of central bankers or of central banks’ objectives, and they are generally poorly informed about recent inflation dynamics. Their forecasts of future inflation reflect high levels of uncertainty and are extremely dispersed, and they are volatile along both short-run and long-run horizons. Similar results can be found for the United States using currently available surveys.
TL;DR: In this article, a nonlinear autoregressive distributed lags (NARDL) model was used to analyze the relation between food and oil prices for Malaysia using a NARDL model.
Abstract: The present paper analyses the relations between food and oil prices for Malaysia using a nonlinear autoregressive distributed lags (NARDL) model. The bounds test of the NARDL specification suggests the presence of cointegration among the variables, which include the food price, oil price and real GDP. The estimated NARDL model affirms the presence of asymmetries in the food price behavior. Namely, in the long run, we find a significant relation between oil price increases and food price. Meanwhile, the long run relation between oil price reduction and the food price is absent. Furthermore, in the short run, only changes in the positive oil price exert significant influences on the food price inflation. With the absence of significant influence of oil price reduction on the food price both in the long run and in the short run, the role of market power in shaping the behavior of Malaysia’s food price is likely to be significant.
TL;DR: In this article, the role of printing less money (discipline) from the public's beliefs about the central bank's likely actions (credibility) was examined, and empirical results support a discipline effect conditioned by political institutions.
Abstract: Despite mixed empirical evidence, in the past two decades central bank independence (CBI) has been on the rise under the assumption that it ensures price stability. Using an encompassing theoretical approach and new yearly data for de jure CBI (seventy-eight countries, 1973�2008), we reexamine this relationship, distinguishing the role of printing less money (discipline) from the public's beliefs about the central bank's likely actions (credibility). Democracies differ from dictatorships in the likelihood of political interference and changes to the law because of the presence of political opposition and the freedom to expose government actions. CBI in democracies should be directly reflected in lower money supply growth. Besides being more disciplinarian, it also ensures a more robust money demand by reducing inflation expectations and, therefore, inflation. Empirical results are robust and support a discipline effect conditioned by political institutions, as well as a credibility effect.
TL;DR: In this article, the authors consider the scope for targeting house prices in simple monetary policy rules using a New Keynesian Dynamic Stochastic General Equilibrium model of the euro area with a housing sector and financial frictions on the household side.
Abstract: We consider the scope for targeting house prices in simple monetary policy rules using a New Keynesian Dynamic Stochastic General Equilibrium model of the euro area with a housing sector and financial frictions on the household side. If the central bank’s main objective is the minimization of inflation and output fluctuations, then a systematic response to house prices does not entail any systematic sizeable welfare improvement. When the objective of monetary policy is the maximization of aggregate (and individual) welfare, then the optimized rule does feature a systematic reaction to house price variations. The sign and size of such reaction crucially depend on the degree of financial frictions in the economy. If the economy is characterized by both a large share of constrained agents and a high average loan-to-value ratio, then it is optimal to positively react to house price movements. Finally, we show that uncertainty about the actual degree of financial frictions suggests some caution in the construction of optimal monetary policy rules. The welfare costs generated by systematically counteracting house price movements are in general smaller than those implied by a procyclical response.
TL;DR: In this paper, the authors disentangle loan supply and demand shocks by using the answers from the confidential Euro area Bank Lending Survey and the U.S. Senior Loan Officer Survey, and find that the bank lending channel is stronger than the balance-sheet channel for firms, whereas the latter is stronger for households.
TL;DR: The authors showed that a standard DSGE model with financial frictions available prior to the recent crisis successfully predicts a sharp contraction in economic activity along with a relatively modest decline in inflation following the rise in financial stress in 2008.
Abstract: Several prominent economists have argued that existing DSGE models cannot properly account for the evolution of key macroeconomic variables during and following the recent Great Recession. We challenge this argument by showing that a standard DSGE model with financial frictions available prior to the recent crisis successfully predicts a sharp contraction in economic activity along with a protracted but relatively modest decline in inflation, following the rise in financial stress in 2008:IV. The model does so even though inflation remains very dependent on the evolution of economic activity and of monetary policy. (
TL;DR: In this article, the shoe-leather costs of inflation in the euro area using monetary data adjusted for holdings of euro banknotes abroad were estimated and shown to be non-negligible even for relatively moderate levels of anticipated inflation.
Abstract: We estimate the shoe-leather costs of inflation in the euro area using monetary data adjusted for holdings of euro banknotes abroad. While we find evidence of marginally negative shoe-leather costs for very low levels of the nominal interest rate, our estimates suggest that the shoe-leather costs are non-negligible even for relatively moderate levels of anticipated inflation. We conclude that, despite the increased circulation of euro banknotes abroad, in the euro area the inflation tax is still predominantly borne by domestic agents, with transfers of resources from abroad remaining small.
TL;DR: This paper examined the long-run hedging ability of gold and silver prices against alternative measures of consumer price index for the UK and US and found that gold can at least fully hedge headline, expected and core CPI in the long run.
TL;DR: The authors decompose US Treasury yields into inflation expectations and maturity-specific interest rate cycles, and derive a measure of risk premium variation from yields, which is defined as variation in yields orthogonal to expected inflation.
Abstract: We study risk premium in US Treasury bonds. We decompose Treasury yields into inflation expectations and maturity-specific interest rate cycles, which we define as variation in yields orthogonal to expected inflation. The short-maturity cycle captures the real short-rate dynamics. Jointly with expected inflation, it comprises the expectations hypothesis (EH) term in the yield curve. Controlling for the EH term, we extract a measure of risk premium variation from yields. The risk premium factor forecasts excess bond returns in and out of sample and subsumes the common bond return predictor obtained as a linear combination of forward rates.
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TL;DR: This paper developed an SVAR framework for a small open economy that relies on both short-run and long-run identification restrictions consistent with their theoretical model, and applied this framework to the United Kingdom, finding that the response of both import and consumer prices to exchange rate fluctuations depends on what caused the fluctuations.
Abstract: A major challenge for monetary policy has been predicting how exchange rate movements will impact inflation. We propose a new focus: incorporating the underlying shocks that cause exchange rate fluctuations when evaluating how these fluctuations ‘pass through’ into import and consumer prices. We show that in a standard open-economy model the relationship between exchange rates and prices depends on the shocks which cause the exchange rate to move. Then we develop an SVAR framework for a small open economy that relies on both short-run and long-run identification restrictions consistent with our theoretical model. Applying this framework to the United Kingdom, we find that the response of both import and consumer prices to exchange rate fluctuations depends on what caused the fluctuations. For example, exchange rate pass-through is relatively large in response to domestic monetary policy shocks, but smaller in response to domestic demand shocks. This framework helps explain why pass-through can change over time, including why sterling’s post-crisis depreciation caused a sharper increase in prices than expected and sterling’s recent appreciation has had a more muted effect.
TL;DR: In this article, the authors explore the possible types of phenomena that simple macroeconomic agent-based models (ABMs) can reproduce and propose a methodology, inspired by statistical physics, that characterizes a model through its phase diagram in the space of parameters.
TL;DR: The authors compare the inflation expectations reported by consumers in a survey with their behavior in a financially incentivized investment experiment and find evidence that most respondents act on their inflation expectations showing patterns consistent with economic theory.
Abstract: We compare the inflation expectations reported by consumers in a survey with their behavior in a financially incentivized investment experiment. The survey is found to be informative in the sense that the beliefs reported by the respondents are correlated with their choices in the experiment. More importantly, we find evidence that most respondents act on their inflation expectations showing patterns consistent with economic theory. Respondents whose behavior cannot be rationalized tend to have lower education and lower numeracy and financial literacy. These findings help confirm the relevance of inflation expectations surveys and provide support to the microfoundations of modern macroeconomic models.
TL;DR: In this paper, the authors show that an announced intention to fix the nominal interest rate for a long enough period of time creates a situation in which reflective equilibrium need not resemble any perfect foresight equilibrium.
Abstract: A prolonged period of extremely low nominal interest rates has not resulted in high inflation. This has led to increased interest in the “Neo-Fisherian” proposition according to which low nominal interest rates may themselves cause inflation to be lower. The fact that standard models of the effects of monetary policy have the property that perfect foresight equilibria in which the nominal interest rate remains low forever necessarily involve low inflation (at least eventually) might seem to support such a view. Here, however, we argue that such a conclusion depends on a misunderstanding of the circumstances under which it makes sense to predict the effects of a monetary policy commitment by calculating the perfect foresight equilibrium consistent with the policy. We propose an explicit cognitive process by which agents may form their expectations of future endogenous variables. Under some circumstances, such as a commitment to follow a Taylor rule, a perfect foresight equilibrium (PFE) can arise as a limiting case of our more general concept of reflective equilibrium, when the process of reflection is pursued sufficiently far. But we show that an announced intention to fix the nominal interest rate for a long enough period of time creates a situation in which reflective equilibrium need not resemble any PFE. In our view, this makes PFE predictions not plausible outcomes in the case of policies of the latter sort. According to the alternative approach that we recommend, a commitment to maintain a low nominal interest rate for longer should always be expansionary and inflationary, rather than causing deflation; but the effects of such “forward guidance” are likely, in the case of a long-horizon commitment, to be much less expansionary or inflationary than the usual PFE analysis would imply.
TL;DR: This paper developed a global VAR model in which all euro area economies are included individually while, at the same time, their common monetary policy is modelled as a function of euro area aggregate output growth and inflation.
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01 Jan 2015
TL;DR: In this paper, the basic New Keynesian model is used to design monetary policy in the open economy and a model with sticky wages and prices is presented for the first time.
Abstract: Preface ix CHAPTER 1 Introduction 1 CHAPTER 2 A Classical Monetary Model 17 CHAPTER 3 The Basic New Keynesian Model 52 CHAPTER 4 Monetary Policy Design in the Basic New Keynesian Model 98 CHAPTER 5 Monetary Policy Tradeoffs: Discretion versus Commitment 126 CHAPTER 6 A Model with Sticky Wages and Prices 163 CHAPTER 7 Unemployment in the New Keynesian Model 199 CHAPTER 8 Monetary Policy in the Open Economy 223 CHAPTER 9 Lessons, Extensions, and New Directions 261 Index 271
TL;DR: In this article, the cyclical properties of sales, regular price changes and average prices paid by consumers were studied using data on prices and quantities sold for numerous retailers across many U.S. metropolitan areas.
Abstract: We study the cyclical properties of sales, regular price changes and average prices paid by consumers (“effective” prices) using data on prices and quantities sold for numerous retailers across many U.S. metropolitan areas.
03 Oct 2015
TL;DR: Inflation targeting is a framework for making and communicating decisions as discussed by the authors, and it has been shown that it has helped to confer tangible benefits in the long-term interest rate volatility.
Abstract: Monetary policy is aimed at maintaining price stability. From the end of the Second World War until the mid to late 1970s, the majority view of academic economists and policy makers alike was that monetary policy had rather little to do with inflation, and was largely ineffective as an instrument of demand management. The academic literature on monetary policy rules has performed a great service in emphasising the importance of expectations. A basic proposition common to most models of the economy is that if demand exceeds the supply capacity of the economy then there will be upward pressure on wage and price inflation. The empirical evidence suggests that inflation targeting has helped to confer tangible benefits. One test of whether inflation expectations are well anchored is the volatility of long-term interest rates. Inflation targeting is a framework for making and communicating decisions. The implications of an inflation target for central bank communications are natural enough.
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10 Feb 2015
TL;DR: In this article, the authors analyzed the implications of the Planck data for cosmic inflation, and found that the scalar spectral index of the primordial power spectrum contains any features, which is consistent with adiabatic initial conditions.
Abstract: We analyse the implications of the Planck data for cosmic inflation. The Planck nominal mission temperature anisotropy measurements, combined with the WMAP large-angle polarization, constrain the scalar spectral index to $n_s = 0.9603 \pm 0.0073$, ruling out exact scale invariance at over 5 $\sigma$. Planck establishes an upper bound on the tensor-to-scalar ratio of r 2 do not provide a good fit to the data. Planck does not find statistically significant running of the scalar spectral index, obtaining $d n_s/d ln k = -0.0134 \pm 0.0090$. Several analyses dropping the slow-roll approximation are carried out, including detailed model comparison and inflationary potential reconstruction. We also investigate whether the primordial power spectrum contains any features. We find that models with a parameterized oscillatory feature improve the fit $\chi^2$ by ~ 10; however, Bayesian evidence does not prefer these models. We constrain several single-field inflation models with generalized Lagrangians by combining power spectrum data with bounds on $f_\mathrm{NL}$ measured by Planck. The fractional primordial contribution of CDM isocurvature modes in the curvaton and axion scenarios has upper bounds of 0.25% or 3.9% (95% CL), respectively. In models with arbitrarily correlated CDM or neutrino isocurvature modes, an anticorrelation can improve $\chi^2$ by approximatively 4 as a result of slightly lowering the theoretical prediction for the $\ell<40$ multipoles relative to the higher multipoles. Nonetheless, the data are consistent with adiabatic initial conditions.
TL;DR: The authors distinguished four explanations for secular stagnation: a rise in global saving, slow population growth that makes investment less attractive, averse trends in technology and productivity growth, and a decline in the relative price of investment goods.
Abstract: Four explanations for secular stagnation are distinguished: a rise in global saving, slow population growth that makes investment less attractive, averse trends in technology and productivity growth, and a decline in the relative price of investment goods. A long view from economic history is most supportive of the last of these four views.
TL;DR: In this article, the authors explore two issues triggered by the crisis and find that a high proportion of recessions have been followed by lower output or even lower growth, suggesting a breakdown of the relation between inflation and activity.
Abstract: We explore two issues triggered by the crisis. First, in most advanced countries, output remains far below the pre-recession trend, suggesting hysteresis. Second, while inflation has decreased, it has decreased less than anticipated, suggesting a breakdown of the relation between inflation and activity. To examine the first, we look at 122 recessions over the past 50 years in 23 countries. We find that a high proportion of them have been followed by lower output or even lower growth. To examine the second, we estimate a Phillips curve relation over the past 50 years for 20 countries. We find that the effect of unemployment on inflation, for given expected inflation, decreased until the early 1990s, but has remained roughly stable since then. We draw implications of our findings for monetary policy.