Showing papers on "Inflation published in 2017"
TL;DR: The authors surveys the new monetarist approach to liquidity, emphasizing the micro structure of frictional transactions, and studies how institutions like monetary exchange, credit arrangements, or intermediation facilitate the exchange process.
Abstract: This essay surveys the new monetarist approach to liquidity. Work in this literature strives for empirical and policy relevance, plus rigorous foundations. Questions include: What is liquidity? Is money essential in achieving desirable outcomes? Which objects can or should serve in this capacity? When can asset prices differ from fundamentals? What are the functions of commitment and collateral in credit markets? How does money interact with credit and intermediation? What can and should monetary policy do? The research summarized emphasizes the micro structure of frictional transactions, and studies how institutions like monetary exchange, credit arrangements, or intermediation facilitate the exchange process.
231 citations
TL;DR: In this article, the authors find that interest rates are low primarily because the premium for safety and liquidity has increased since the late 1990s, and to a lesser extent because economic growth has slowed.
Abstract: Why are interest rates so low in the Unites States? We find that they are low primarily because the premium for safety and liquidity has increased since the late 1990s, and to a lesser extent because economic growth has slowed. We reach this conclusion using two complementary perspectives: a flexible time series model of trends in Treasury and corporate yields, inflation, and long-term survey expectations; and a medium-scale dynamic stochastic general equilibrium model. We discuss the implications of this finding for the natural rate of interest.
202 citations
TL;DR: In this article, the authors consider the effect of low nominal interest rates on economic and price stability and show that the adverse effects of low real interest rates may be substantial at inflation targets near 2 percent if the equilibrium real interest rate is low.
Abstract: Nominal interest rates may remain substantially below the averages of the last half century, because central banks' inflation objectives lie below the average level of inflation, and estimates of the real interest rate that are likely to prevail over the long run fall notably short of the average real interest rate experienced during this period. Persistently low nominal interest rates may lead to more frequent and costly episodes at the effective lower bound (ELB) on nominal interest rates. We revisit the frequency and potential costs of such episodes in a world of low interest rates, using both a dynamic stochastic general equilibrium (DSGE) model and the Federal Reserve's large-scale econometric model, the FRB/US model. Four main conclusions emerge. First, monetary policy strategies based on traditional, simple policy rules lead to poor economic performance when the equilibrium interest rate is low, with economic activity and inflation more volatile and systematically falling short of desirable levels. Moreover, the frequency and length of ELB episodes under such policy approaches are estimated to be significantly higher than in previous studies. Second, a risk adjustment to a simple rule—whereby monetary policymakers are more accommodative, on average, than prescribed by the rule—ensures that inflation averages its 2 percent objective, and requires that policymakers systematically seek inflation near 3 percent when the ELB is not binding. Third, commitment strategies, whereby monetary accommodation is not removed until either inflation or economic activity overshoots its long-run objective, are very effective in both the DSGE and FRB/US models. And fourth, our simulation results suggest that the adverse effects on economic and price stability associated with the ELB may be substantial at inflation targets near 2 percent if the equilibrium real interest rate is low and monetary policy follows a traditional approach. Whether such adverse effects could justify a higher inflation target depends upon the degree to which monetary policy strategies that differ substantially from such traditional approaches are feasible, and an assessment of a broader array of the inflation target's effects on economic welfare.
144 citations
TL;DR: This paper found that contractionary monetary policy shocks increase income inequality, on average, and that the effect is asymmetric and depends on the state of the business cycle and the share of labor income.
142 citations
TL;DR: In this article, the international spillovers of US monetary policy shocks on a number of macroeconomic and financial variables in 36 advanced and emerging economies are studied, and no clear-cut systematic relation emerges between country responses and likely relevant country characteristics, such as their income level, dollar exchange rate flexibility, financial openness, trade openness vs. the US, dollar exposure in foreign assets and liabilities, and incidence of commodity exports.
122 citations
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TL;DR: The authors evaluate the role of redistribution in the transmission mechanism of monetary policy to consumption and find that three channels affect aggregate spending when winners and losers have different marginal propensity to consume: an earnings heterogeneity channel from unequal income gains, a Fisher channel from unexpected inflation, and an interest rate exposure channel from real interest rate changes.
Abstract: This paper evaluates the role of redistribution in the transmission mechanism of monetary policy to consumption. Three channels affect aggregate spending when winners and losers have different marginal propensities to consume: an earnings heterogeneity channel from unequal income gains, a Fisher channel from unexpected inflation, and an interest rate exposure channel from real interest rate changes. Sufficient statistics from Italian and U.S. data suggest that all three channels are likely to amplify the effects of monetary policy. A standard incomplete markets model can deliver the empirical magnitudes if assets have plausibly high durations but a counterfactual degree of inflation indexation.
122 citations
TL;DR: The authors examined the role of asymmetries in oil price-inflation nexus for selected net oil exporting and net oil importing countries using quarterly data from 2000 to 2014 and found a significant long-run positive relationship between oil price and inflation for both categories with mixed evidence in the short run.
120 citations
TL;DR: This article found that cognitive limitations also appear to be a source of information frictions: even when information about inflation statistics is available, individuals still place a significant weight on inaccurate sources of information, such as their memories of the price changes of the supermarket products they purchase.
Abstract: Information frictions play a central role in the formation of household inflation expectations, but there is no consensus about their origins. We address this question with novel evidence from survey experiments. We document two main findings. First, individuals in low inflation contexts have significantly weaker priors about the inflation rate. This finding suggests that rational inattention may be an important source of information frictions. Second, cognitive limitations also appear to be a source of information frictions: even when information about inflation statistics is available, individuals still place a significant weight on inaccurate sources of information, such as their memories of the price changes of the supermarket products they purchase. We discuss the implications of these findings for macroeconomic models and policymaking. (JEL D83, D84, E31, L11, L81, O11)
118 citations
TL;DR: In this article, the authors explore the warm inflation scenario theoretical predictions looking at two different dissipative regimes for several representative primordial potentials and show that warm inflation is able to decrease the tensor-to-scalar ratio value.
Abstract: We explore the warm inflation scenario theoretical predictions looking at two different dissipative regimes for several representative primordial potentials As it is well known, warm inflation is able to decrease the tensor-to-scalar ratio value, rehabilitating several primordial potentials ruled out in the cold inflation context by the recent cosmic microwave background data Here we show that warm inflation is also able to produce a running of the running ${\ensuremath{\beta}}_{s}$ positive and within the Planck data limits This is very remarkable since the standard cold inflation model is unable to justify the current indication of a positive constraint on ${\ensuremath{\beta}}_{s}$ We achieve a parametrization for the primordial power spectrum able to take into account higher order effects as the running of the spectral index and the running of the running, and we perform statistical analysis using the most up-to-date Planck data to constrain the dissipative effects We find that the warm inflation can explain the current observables with a good statistical significance, even for those potentials ruled out in the simplest cold inflation scenario
101 citations
TL;DR: In this article, the expansion of global value chains (GVCs), i.e., cross-border trade in intermediate goods and services, is an important channel through which global economic slack influences domestic inflation.
Abstract: Greater international economic interconnectedness over recent decades has been changing inflation dynamics. This paper presents evidence that the expansion of global value chains (GVCs), ie cross-border trade in intermediate goods and services, is an important channel through which global economic slack influences domestic inflation. In particular, we document the extent to which the growth in GVCs explains the established empirical correlation between global economic slack and national inflation rates, both across countries and over time. Accounting for the role of GVCs, we also find that the conventional trade-based measures of openness used in previous studies are poor proxies for this transmission channel. The results support the hypothesis that as GVCs expand, direct and indirect competition among economies increases, making domestic inflation more sensitive to the global output gap. This can affect the trade-offs that central banks face when managing inflation.
98 citations
TL;DR: In this article, the authors estimate a model for the US economy with monetary/fiscal policy mix changes, showing that inflation dropped only when monetary policy and agents' beliefs about fiscal backing switched; successful disinflations require fiscal backing.
TL;DR: In this paper, the authors analyzed the impact of the ECB inflation target and inflation projections on inflation expectations in the euro area and found that longer-term inflation expectations have become somewhat more sensitive to shorter-term ones and to actual HICP inflation.
TL;DR: In this article, the authors investigated the dynamic relationship of global crude oil and gold price in a two-regime vector error-correction model with a single cointegrating vector and a threshold effect on errorcorrection terms as proposed by Hansen and Seo.
TL;DR: In this article, the authors provide empirical evidence on the macroeconomic impact of the expanded asset purchase programme (APP) announced by the European Central Bank (ECB) in January 2015 and identify the shock associated to the APP with a combination of sign, timing and magnitude restrictions in the context of an estimated time-varying parameter VAR model with stochastic volatility.
Abstract: This paper provides empirical evidence on the macroeconomic impact of the expanded asset purchase programme (APP) announced by the European Central Bank (ECB) in January 2015. The shock associated to the APP is identified with a combination of sign, timing and magnitude restrictions in the context of an estimated time-varying parameter VAR model with stochastic volatility. The evidence suggests that the APP had a significant upward effect on both real GDP and HICP inflation in the euro area during the first two years. The effect on real GDP appears to be stronger in the short term, while that on HICP inflation seems more marked in the medium term. Moreover, several channels of transmission appear to have been activated, including the portfolio rebalancing channel, the exchange rate channel, the inflation re-anchoring channel and the credit channel.
TL;DR: The authors introduced a method of quantifying the uncertainty associated with round responses in pre-existing survey data and found that more uncertain consumers are more reluctant to spend on durables, cars, and homes.
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TL;DR: In this article, the relationship between oil price and inflation tends to change over short periods and the oil price-inflation nexus is stronger in oil exporting countries than oil importing countries, while the results are largely insensitive to the nature of data frequency, the behaviour of asymmetry suggests otherwise.
Abstract: In this paper, we model the relationship between oil price and inflation for selected OPEC and EU countries using monthly data from 2000 to 2014. We employ both the Linear (Symmetric) ARDL by Pesaran et al. (2001) and Nonlinear (Asymmetric) ARDL by Shin et al. (2014) and we also account for structural breaks using the Bai and Perron (2003) test that allows for multiple structural changes in regression models. Six findings are discernible from our analyses. First, the relationship between oil price and inflation tends to change over short periods. Secondly, the oil price-inflation nexus is stronger in oil exporting countries than oil importing countries. Thirdly, oil price asymmetries seem to matter more when dealing with oil exporting nations. Fourthly, it may be necessary to pre-test for structural breaks when modelling the relationship between oil price and inflation regardless of the category being analyzed. Fifth, while asymmetric effect for the oil exporting (OPEC) is not sensitive to structural breaks, the effect seems to diminish for oil-importing (EU) countries in the presence of breaks. Sixth, while the results are largely insensitive to the nature of data frequency, the behaviour of asymmetry suggests otherwise.
TL;DR: The authors show that the predictions of new-Keynesian models are strongly affected by equilibrium selection, and that these predictions are larger as prices become less sticky and as changes are expected further in the future.
TL;DR: In this article, the authors use a Qual VAR, a conventional VAR system augmented with binary policy announcements, to extract a latent indicator of tightening and easing pressure, respectively, for China and find that bank loans are not sensitive to policy changes, which implies that window guidance is still a necessary policy tool.
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TL;DR: In this article, the link between real interest rates and saving-investment determinants appears tenuous, and the authors find evidence that persistent shifts in real interest rate coincide with changes in monetary regimes.
Abstract: Prevailing explanations of the decline in real interest rates since the early 1980s are premised on the notion that real interest rates are driven by variations in desired saving and investment. But based on data stretching back to 1870 for 19 countries, our systematic analysis casts doubt on this view. The link between real interest rates and saving-investment determinants appears tenuous. While it is possible to find some relationships consistent with the theory in some periods, particularly over the last 30 years, they do not survive over the extended sample. This holds both at the national and global level. By contrast, we find evidence that persistent shifts in real interest rates coincide with changes in monetary regimes. Moreover, external influences on countries' real interest rates appear to reflect idiosyncratic variations in interest rates of countries that dominate global monetary and financial conditions rather than common movements in global saving and investment. All this points to an underrated role of monetary policy in determining real interest rates over long horizons.
TL;DR: In this article, the authors examined this issue using dynamic term structure m and found that the downtrend in US interest rates over the past two decades may partly reflect a decline in the longer-run equilibrium real rate of interest.
Abstract: The downtrend in US interest rates over the past two decades may partly reflect a decline in the longer-run equilibrium real rate of interest We examine this issue using dynamic term structure m
TL;DR: In this article, the authors use scanner data to estimate inflation rates at the household level and find that household-level inflation rates have an annual interquartile range of 62-90 percentage points.
TL;DR: In this article, the authors examine how cross-border input linkages shape the response of demand for value added to international relative price changes, and demonstrate that these conceptual insights are quantitatively important in a case study of European competitiveness.
Abstract: We examine how cross-border input linkages shape the response of demand for value added to international relative price changes. We define a novel value-added real effective exchange rate (REER), which aggregates bilateral value-added price changes. Spillovers via input linkages lower the sensitivity of the value-added REER to price changes by supply chain partners because they counterbalance demand-side expenditure switching. Input linkages also raise the price elasticity of demand relative to the conventional REER framework, making demand more sensitive to REER changes. Using global input-output data, we demonstrate that these conceptual insights are quantitatively important in a case study of European competitiveness.
TL;DR: In this article, the authors examined the behavior of Swiss house prices in relation to immigration flows for 85 regions from 2001 to 2006 and showed that the nexus between immigration and house prices holds even in an environment of low house price inflation and modest immigration flows.
Abstract: This study examines the behavior of Swiss house prices in relation to immigration flows for 85 regions from 2001 to 2006. The results show that the nexus between immigration and house prices holds even in an environment of low house price inflation and modest immigration flows. An immigration inflow equal to 1 % of an area’s population is coincident with an increase in prices for single-family homes of about 2.7 %, a result consistent with previous studies. The overall immigration effect for single-family houses captures almost two-thirds of the total price increase.
TL;DR: The authors analyzed the role of monetary and macro-prudential policy shocks in explaining deviations from the other policy's objective, by applying historical decompositions, and found that macroPRUDENT policy shocks helped stabilise inflation and monetary policy shocks contributed to financial stability.
TL;DR: In this article, a model that allows for shifts in the aggressiveness of monetary policy and time variation in the distribution of macroeconomic shocks is proposed to induce variations in the cyclical properties of inflation and the riskiness of bonds.
Abstract: The paper estimates a model that allows for shifts in the aggressiveness of monetary policy and time variation in the distribution of macroeconomic shocks. These model features induce variations in the cyclical properties of inflation and the riskiness of bonds. The estimation identifies inflation as procyclical from the late 1990s, when the economy shifted toward aggressive monetary policy and experienced procyclical macroeconomics shocks. Since bonds hedge stock market risks when inflation is procylical, the stock-bond return correlation turned negative in the late 1990s. The risks of encountering countercyclical inflation in the future could lead to an upward-sloping yield curve, like in the data.
TL;DR: In this paper, the authors compared the inflationary impact of commodity price shocks across countries to a broad range of structural characteristics and policy frameworks over the period 2001-2010, using several approaches.
TL;DR: The authors examined variability in the effects of uncertainty shocks using a panel of international data and found that the negative effect of uncertainty shock on the US economy has changed substantially over time, and that the increased vulnerability of small open economies to uncertainty shocks is associated with an increase in international trade.
TL;DR: In this article, the changes in monetary policy affect the level of bond yields through their effect on expected inflation, while changes in the correlation between growth and inflation affect both the level as well as the volatility of the bond yields.
Abstract: I provide empirical evidence of changes in the U.S. Treasury yield curve and related macroeconomic factors, and investigate whether the changes are brought about by external shocks, monetary policy, or by both. To explore this, I characterize bond market exposures to macroeconomic and monetary policy risks, using an equilibrium term structure model with recursive preferences in which inflation dynamics are endogenously determined. In my model, the key risks that affect bond market prices are changes in the correlation between growth and inflation and changes in the conduct of monetary policy. Using a novel estimation technique, I find that the changes in monetary policy affect the level of bond yields through their effect on expected inflation, while the changes in the correlation between growth and inflation affect both the level as well as the volatility of bond yields. Consequently, the changes in the correlation structure are the main contributor to bond risk premia and to bond market volatility. The time variations within a regime and risks associated with moving across regimes lead to the failure of the Expectations Hypothesis and to the excess bond return predictability regression of Cochrane and Piazzesi (2005), as in the data.
TL;DR: In this article, the authors examined the inflation hedging ability of gold in the UK based on a fractional integration and cointegration framework, which gives more flexibility as it does not restrict the order of integration between zero and 1.
TL;DR: In this article, the authors argue that low inflation likely reflects factors whose influence should fade over time. But many uncertainties attend this assessment, and downward pressures on inflation could prove to be unexpectedly persistent.
Abstract: Low inflation likely reflects factors whose influence should fade over time. But many uncertainties attend this assessment, and downward pressures on inflation could prove to be unexpectedly persistent. My colleagues and I may have misjudged the strength of the labor market, the degree to which longer-run inflation expectations are consistent with our inflation objective, or even the fundamental forces driving inflation. In interpreting incoming data, we will need to stay alert to these possibilities and, in light of incoming information, adjust our views about inflation, the overall economy, and the stance of monetary policy best suited to promoting maximum employment and price stability. How should policy be formulated in the face of such significant uncertainties? In my view, it strengthens the case for a gradual pace of adjustment. But we should also be wary of moving too gradually. It would be imprudent to keep monetary policy on hold until inflation is back to 2%.