Showing papers on "Inflation published in 2016"

The Inflation Tax in a Real Business Cycle Model

Abstract: Money is incorporated into a real business cycle model using a cash-in-advance constraint. The model economy is used to analyze whether the business cycle is different in high inflation and low inflation economies and to analyze the impact of variability in the growth rate of money. In addition, the welfare cost of the inflation tax is measured and the steady-state properties of high and low inflation economies are compared.

Two Illustrations of the Quantity Theory of Money

Abstract: of two central implications of the quantity theory of money: that a given change in the rate of change in the quantity of money induces (i) an equal change in the rate of price inflation; and (ii) an equal change in nominal rates of interest. The illustrations were obtained by comparing moving averages of the three variables in question, using quarterly U.S. time-series for the period 1953-77. Readers may find the results of interest as additional confirmation of the quantity theory, as an example of one way in which the quantity-theoretic relationships can be uncovered via atheoretical methods from time-series which are subject to a variety of other forces, or as a measure of the extent to which the inflation and interest rate experience of the postwar period can be understood in terms of purely classical, monetary forces. The theoretical background of the study is reviewed, very briefly as it is familiar material, in the next section. The data processing methods are described and rationalized in Section II. The illustrations

Inflation and Unemployment

Abstract: When the Bank of Sweden established the prize for Economic Science in memory of Alfred Nobel (1968), there doubtless was as there doubtless still remains widespread skepticism among both scientists and the broader public about the appropriateness of treating economics as parallel to physics, chemistry, and medicine. These are regarded as “exact sciences” in which objective, cumulative, definitive knowledge is possible. Economics, and its fellow social sciences, are regarded more nearly as branches of philosophy than of science properly defined, enmeshed with values at the outset because they deal with human behavior. Do not the social sciences, in which scholars are analyzing the behavior of themselves and their fellow men, who are in turn observing and reacting to what the scholars say, require fundamentally different methods of investigation than the physical and biological sciences? Should they not be judged by different criteria?

The Billion Prices Project: Using Online Prices for Measurement and Research

Abstract: A large and growing share of retail prices all over the world are posted online on the websites of retailers. This is a massive and (until recently) untapped source of retail price information. Our objective with the Billion Prices Project, created at MIT in 2008, is to experiment with these new sources of information to improve the computation of traditional economic indicators, starting with the Consumer Price Index. We also seek to understand whether online prices have distinct dynamics, their advantages and disadvantages, and whether they can serve as reliable source of information for economic research. The word "billion" in Billion Prices Project was simply meant to express our desire to collect a massive amount of prices, though we in fact reached that number of observations in less than two years. By 2010, we were collecting 5 million prices every day from over 300 retailers in 50 countries. We describe the methodology used to compute online price indexes and show how they co-move with consumer price indexes in most countries. We also use our price data to study price stickiness, and to investigate the "law of one price" in international economics. Finally we describe how the Billion Prices Project data are publicly shared and discuss why data collection is an important endeavor that macro- and international economists should pursue more often.

Liquidity Trap and Excessive Leverage

Abstract: We investigate the role of macroprudential policies in mitigating liquidity traps. When constrained households engage in deleveraging, the interest rate needs to fall to induce unconstrained households to pick up the decline in aggregate demand. If the fall in the interest rate is limited by the zero lower bound, aggregate demand is insufficient and the economy enters a liquidity trap. In this environment, households’ ex ante leverage and insurance decisions are associated with aggregate demand externalities. Welfare can be improved with macroprudential policies targeted toward reducing leverage. Interest rate policy is inferior to macroprudential policies in dealing with excessive leverage. (JEL D14, E23, E32, E43, E52, E61, E62)

Understanding the Impact of

Abstract: Since the late 1980s, almost all Latin American countries have adopted a series of far-reaching economic reforms, especially trade, financial, and capital account liberalization. Increased economic openness has gone hand in hand with large financial inflows?particularly in the first half of the 1990s?and has brought new sources of economic growth. As a result, economies grew, inflation declined, and there was a big surge in foreign cap ital inflows. Although overall growth slowed after 1995, the region has expe rienced strong growth in the past five years, the best sustained performance since the 1970s. With the exception of a handful of countries, this economic growth has been accompanied by relatively modest inflation. Despite these positive results, virtually all Latin American countries share similar problems: uneven economic growth, unacceptably high poverty and malnutrition rates, and lagging agricultural growth. More than 60 percent of the region's poor live in rural areas, where slow economic growth, unequal distribution of assets, inadequate public investment and public services, and vulnerability to natural and economic shocks are major policy issues. The 2007-08 food price crisis exacerbated these problems. Prior to the cri sis, the region was considered relatively stable and capable of absorbing exter nal shocks, thanks to its higher foreign exchange liquidity; decreased public sector and external borrowing needs; exchange rate flexibility; lower exposure to currency, interest rate, and rollover risks in public sector debt portfolios; and improved access to local-currency loans. Nevertheless, the food price cri sis severely affected most of the Latin American countries in terms of infla tion, especially food inflation.

Capacity Utilization Measures: Underlying Economic Theory and an Alternative Approach

Abstract: Measures of industrial capacity utilization (hereafter, CU) have been used extensively in helping to explain changes in the rate of investment, labor productivity and inflation. The CU measures have also been used to obtain indices of capital in use, as distinct from capital stock in place. A number of alternative measures of CU are periodically calculated and published; the 1980 Economic Report of the President, for example, contains three series, that by the Federal Reserve Board, the U.S. Department of Commerce (Bureau of Economic Analysis) and the Wharton School of Finance. Other publicly available series are those prepared by McGraw-Hill Publishing Company, the U.S. Department of Commerce (Bureau of the Census), and Rinfret-Boston Associates, Inc. Although a host of CU measures is publicly available, it is not at all clear how one should interpret changes over time in each measure or variations among them. A principal reason underlying these interpretation problems is that the crucial link between underlying economic theory and the constructed measure of CU is weak. One way in which this issue has manifested itself in the policy domain over the last five years has been with respect to the uncertain effects of dramatic increases in energy prices on capacity output and on CU. Each of the CU measures noted above is computed in such a way that explicitly ignores any role for energy prices. Yet several times during the last decade, though growth to apparently high rates of CU had taken place, investment and average labor productivity were much lower than expected, and the rate of price increase much greater. In brief, during the last decade the explanatory power of alternative CU measures has dropped sharply. Some have conjectured that post-OPEC energy price increases may have brought about major changes in the U. S. economy so that old quantitative relationships between measured CU and investment, labor productivity, and price inflation may have been altered substantially. In order to assess effects of changes in PE on CU, a re-examination of the notion and measurement of CU is needed, based on the framework of the economic theory of the firm. That is the focus of this paper.

Macroeconomic Dynamics Near the ZLB: A Tale of Two Countries

Abstract: We compute a sunspot equilibrium in an estimated small-scale New Keynesian model with a zero lower bound (ZLB) constraint on nominal interest rates and a full set of stochastic fundamental shocks. In this equilibrium, a sunspot shock can move the economy from a regime in which inflation is close to the central bank’s target to a regime in which the central bank misses its target, inflation rates are negative, and interest rates are close to zero with high probability. A non-linear filter is used to examine whether the U.S. in the aftermath of the Great Recession and Japan in the late 1990s transitioned to a deflation regime. The results are somewhat sensitive to the model specification, but on balance, the answer is affirmative for Japan and negative for the U.S.

The Phillips Curve: Back to the '60s?

Abstract: This paper reexamines the behavior of inflation and unemployment and reaches four conclusions: 1) The U.S. Phillips curve is alive and well (at least as well as in the past). 2) Inflation expectations however have become steadily more anchored. 3) The slope of the curve has substantially declined. But the decline dates back to the 1980s rather than to the crisis. 4) The standard error of the residual in the relation is large, especially in comparison to the low level of inflation. Each of the four conclusions presents challenges for the conduct of monetary policy.

Are Sticky Prices Costly? Evidence from the Stock Market

Abstract: We show that after monetary policy announcements, the conditional volatility of stock market returns rises more for firms with stickier prices than for firms with more flexible prices. This differential reaction is economically large and strikingly robust to a broad array of checks. These results suggest that menu costs—broadly defined to include physical costs of price adjustment, informational frictions, etc.—are an important factor for nominal price rigidity at the micro level. We also show that our empirical results are qualitatively and, under plausible calibrations, quantitatively consistent with New Keynesian macroeconomic models in which firms have heterogeneous price stickiness. (JEL E12, E31, E43, E44, E52, G12, L11)

Unconventional monetary policies: a re-appraisal

Abstract: We explore the effectiveness and balance of benefits and costs of so-called "unconventional" monetary policy measures extensively implemented in the wake of the financial crisis: balance sheet policies (commonly termed "quantitative easing"), forward guidance and negative policy rates. Our objective is to provide the reader with a helpful entry point to the burgeoning empirical literature and with a specific perspective on the complex issues involved. We reach three main conclusions: there is ample evidence that, to varying degrees, these measures have succeeded in influencing financial conditions even though their ultimate impact on output and inflation is harder to pin down; the balance of the benefits and costs is likely to deteriorate over time; and the measures are generally best regarded as exceptional, for use in very specific circumstances. Whether this will turn out to be the case, however, is doubtful at best and depends on more fundamental features of monetary policy frameworks. In the paper, we also provide a critique of prevailing analyses of "helicopter money" and explore in more depth the role of negative nominal interest rates in our fundamentally monetary economies, highlighting some risks.

Labor Force Participation, Wage Rigidities, and Inflation

Abstract: The fall in US labor force participation during the Great Recession stands in sharp contrast with its parallel increase in the euro area. In addition to structural forces, cyclical factors are shown to account for this phenomenon, with the participation rate being procyclical in the US from the inception of the crisis and countercyclical in the euro area. We rationalize these diverging dynamics by using a general equilibrium business cycle model, which nests the endogenous participation decisions into a search and matching model. We show that the "added worker" effect might outweigh the "discouragement effect" if real wage rigidities are allowed for and/or habit in consumer preferences is sufficiently strong. We then draw the implications of variable labor force participation rates for inflation and establish the following result: if endogenous movements in labor market participation are envisaged, then the degree of real wage rigidities becomes almost irrelevant for price dynamics. Indeed, during recessions, the upward pressures on inflation stemming from the lack of a downward adjustment in real wages are offset by an opposite influence from the additional looseness in the labor market, due to the higher participation rate associated with wage rigidities.

Signalling Effects of Monetary Policy

Abstract: We develop a dynamic general equilibrium model in which the policy rate signals the central bank’s view about macroeconomic developments to price setters. The model is estimated with likelihood methods on a U.S. data set that includes the Survey of Professional Forecasters as a measure of price setters’ inflation expectations. This model improves upon existing perfect information models in explaining why, in the data, inflation expectations respond with delays to monetary impulses and remain disanchored for years. In the 1970s, U.S. monetary policy is found to signal-persistent inflationary shocks, explaining why inflation and inflation expectations were so persistently heightened. The signalling effects of monetary policy also explain why inflation expectations adjusted more sluggishly than inflation after the robust monetary tightening of the 1980s.

The Real Effects of Monetary Shocks in Sticky Price Models: A Sufficient Statistic Approach

Abstract: We prove that the ratio of kurtosis to the frequency of price changes is a sufficient statistic for the real effects of monetary shocks, measured by the cumulated output response following the shock. The sufficient statistic result holds in a large class of models which includes Taylor (1980); Calvo (1983); Reis (2006 ); Golosov and Lucas (2007 ); Nakamura and Steinsson (2010); Midrigan (2011); and Alvarez and Lippi (2014). Several models in this class are able to account for the positive excess kurtosis of the size distribution of price changes that appears in the data. We review empirical measures of kurtosis and frequency and conclude that a model that successfully matches the microevidence on kurtosis and frequency produces real effects that are about four times larger than in the Golosov-Lucas model, and about 30 percent below those of the Calvo model. We discuss the robustness of our results to changes in the setup, including small inflation and leptokurtic cost shocks. (JEL, E23, E31)

The "Mystery of the Printing Press" Monetary Policy and Self-fulfilling Debt Crises

Abstract: We study the mechanism by which unconventional (balance-sheet) monetary policy can rule out self-fulfilling sovereign default in a model with optimizing but discretionary fiscal and monetary policymakers By purchasing sovereign debt, the central bank e§ectively swaps risky government paper for monetary liabilities only exposed to inflation risk, thus yielding a lower interest rate We characterize a critical threshold for central bank purchases beyond which, absent fundamental fiscal stress, the government strictly prefers primary surplus adjustment to default Since default may still occur for fundamental reasons, however, the central bank faces the risk of losses on sovereign debt holdings, which may generate ine¢cient inflation This risk does not undermine the credibility of a backstop, nor the ability of a central bank to pursue its inflation objectives when the latter enjoys fiscal backing or fiscal authorities are su¢ciently averse to inflation

Understanding Inflation as a Joint Monetary-Fiscal Phenomenon

Abstract: We develop the theory of price-level determination in a range of models using both ad hoc policy rules and jointly optimal monetary and fiscal policies and discuss empirical issues that arise when trying to identify monetary–fiscal regime. The chapter concludes with directions in which theoretical and empirical developments may go.

The Price Is Right: Updating Inflation Expectations in a Randomized Price Information Experiment

Abstract: Using a unique, randomized information experiment embedded in a survey, this paper investigates how consumers’ inflation expectations respond to new information. We find that respondents, on average, update their expectations in response to (certain types of) information, and do so sensibly, in a manner consistent with Bayesian updating. As a result of information provision, the distribution of inflation expectations converges toward its center and cross-sectional disagreement declines. We document heterogeneous information processing by gender and present suggestive evidence of respondents forecasting under asymmetric loss. Our results provide support for expectation-formation models in which agents form expectations rationally but face information constraints.

Mending the broken link: heterogeneous bank lending and monetary policy pass-through

Abstract: We analyse the pass-through of monetary policy measures to lending rates to firms and households in the euro area using a unique bank-level dataset Bank balance sheet characteristics such as the capital ratio and the exposure to sovereign debt are responsible for the heterogeneity of pass-through of conventional monetary policy changes The location of a bank is instead irrelevant Non-standard measures normalized the capacity of banks to grant loans resulting in a significant compression in lending rates Banks with a high level of non-performing loans and a low capital ratio were the most responsive to the measures Finally, we quantify the effects of non-standard policies on the real economic activity using a standard macroeconomic model and find that in absence of these measures both inflation and output would have been significantly lower JEL Classification: C3, E4, E5, G2

Risk Management for Monetary Policy Near the Zero Lower Bound

Abstract: With projections showing inflation heading back toward target and the labor market continuing to improve, the Federal Reserve has begun to contemplate an increase in the federal funds rate. There is, however, substantial uncertainty around these projections. How should this uncertainty affect monetary policy? In many standard models uncertainty has no effect. In this paper, we demonstrate that the zero lower bound (ZLB) on nominal interest rates implies that the central bank should adopt a looser policy when there is uncertainty. In the current context this result implies that a delayed liftoff is optimal. We demonstrate this result theoretically through two canonical macroeconomic models. Using numerical simulations of our models calibrated to the current environment, we find that optimal policy calls for a delay in liftoff of two to three quarters relative to a policy that does not take into account uncertainty about policy being constrained by the ZLB. We then use a narrative study of Federal Reserve communications and estimated policy reaction functions to show that risk management is a long-standing practice in the conduct of monetary policy.

Inflation Targeting and 'Leaning Against the Wind'

Abstract: Let me start from standard flexible inflation targeting, according to which monetary policy aims at stabilizing inflation around an announced inflation target and resource utilization around a long-run sustainable rate Furthermore, let me for concreteness assume that the unemployment rate is a satisfactory measure of resource utilization, so stabilizing resource utilization means stabilizing unemployment around an estimated long-run sustainable rate A main current question is, should standard flexible inflation targeting be combined with some degree of “leaning against the wind”, as discussed, for instance, by Smets (2013) and at this conference by the introductory remarks of NBP President Marek Belka

Bank Competition and Financial Stability: Evidence from the Financial Crisis

Abstract: We examine the link between bank competition and financial stability using the recent financial crisis as the setting. We utilize variation in banking competition at the state level and find that banks facing less competition are more likely to engage in risky activities, more likely to face regulatory intervention, and more likely to fail. Focusing on the real estate market, we find that states with less competition had higher rates of mortgage approval, experienced greater inflation in housing prices before the crisis, and experienced a steeper decline in housing prices during the crisis. Overall, our study is consistent with greater competition increasing financial stability.

Group Cost-of-Living Indexes

Abstract: When households have different consumption patterns, whose cost of living should an actual price index represent? This issue was first raised by J. L. Nicholson and S. J. Prais in the 1950's. Both made essentially the same point: official price indexes give each household's consumption pattern "an implicit weight proportional to its total expenditures" (see Nicholson, p. 540). Prais calls such an index "plutocratic," and both Nicholson and Prais suggest an alternative "democratic price index" which gives all households equal weight. A "group cost-of-living index" is an index that measures the impact of price changes on the welfare of a group or population of households. To define such an index requires an explicit or implicit concept of "the welfare of a group," and hence requires interpersonal comparison and distributional judgments. Since group indexes such as the Consumer Price Index play an important role in our perception of inflation and the formation of macro-economic policy and are used to escalate wages and Social Security benefits, they have significant effects on government decisions and economic welfare. Despite their intellectual interest and practical importance, however, until recently they have been virtually ignored by index number theorists. The theory of the cost-of-living index (CLI) provides a generally accepted framework for measuring the impact of price changes on the welfare of a particular household. This paper extends the CLI concept to groups and discusses which questions require group indexes and which do not. I begin by introducing some notation and terminology in the context of household CLIs. A household's CLI is the ratio of the expenditures required to attain a particular base indifference curve in two price situations. Suppose there are n goods and S households, and denote the preference ordering of the rth household by R r. The base indifference curve can be identified by a goods collection, Xro, which lies on it. The "expenditure function," Er(P, xr, Rr), shows the minimum expenditure required to attain the base indifference curve at prices P. The CLI of the rth household, Ir(Pa,pb,XroRr) is the ratio of the minimum expenditure required to attain the base indifference curve at prices pa (comparison prices) to that required at prices pb (reference prices). Except in very special cases, the value of the CLI depends on the base indifference curve at which it is evaluated; as successively higher base indifference curves are specified, one would expect the prices of "luxuries" to become more important relative to the prices of "necessities."' Hence, it is convenient to regard the CLI as a function of the base indifference curve rather than as a single number corresponding to a particular base. Thus, instead of offering guidance in choosing an appropriate base indifference curve, theory suggests that there is no need to choose. To construct the exact CLI, an investigator needs to know the household's preferences. Lacking this knowledge, he rnust fall back on indexes which require less information and which are upper bounds on the exact index. The "Laspeyres index," Jr(papbXrb) is the ratio of the cost of purchasing the reference period consumption basket at comparison prices to its cost

An uncertain suggestion for gold-pricing models: the effect of economic policy uncertainty on gold prices

Abstract: Gold, whether held in physical form or through financial claims, is of utmost importance to investors, central bankers, and sovereign nations alike. Yet empirically validated explanations of its volatile price remain elusive. Without an ex-post understanding of the determinants of gold prices, ex-ante forecasting is a fruitless endeavor. In this research, an index of US and European economic policy uncertainty is incorporated into a short-run pricing model for gold. The results suggest that in addition to gold being a hedge against inflation, increases in economic policy uncertainty contribute to increases in the price of gold.

Outlier removal, sum scores, and the inflation of the Type I error rate

Abstract: In psychology, outliers are often excluded before running an independent samples t test, and data are often nonnormal because of the use of sum scores based on tests and questionnaires. This article concerns the handling of outliers in the context of independent samples t tests applied to nonnormal sum scores. After reviewing common practice, we present results of simulations of artificial and actual psychological data, which show that the removal of outliers based on commonly used Z value thresholds severely increases the Type I error rate. We found Type I error rates of above 20% after removing outliers with a threshold value of Z = 2 in a short and difficult test. Inflations of Type I error rates are particularly severe when researchers are given the freedom to alter threshold values of Z after having seen the effects thereof on outcomes. We recommend the use of nonparametric Mann-Whitney-Wilcoxon tests or robust Yuen-Welch tests without removing outliers. These alternatives to independent samples t tests are found to have nominal Type I error rates with a minimal loss of power when no outliers are present in the data and to have nominal Type I error rates and good power when outliers are present.