Showing papers on "Inflation published in 2018"

Adjusting Health Expenditures for Inflation: A Review of Measures for Health Services Research in the United States

Abstract: Objective To provide guidance on selecting the most appropriate price index for adjusting health expenditures or costs for inflation. Data Sources Major price index series produced by federal statistical agencies. Study Design We compare the key characteristics of each index and develop suggestions on specific indexes to use in many common situations and general guidance in others. Data Collection/Extraction Methods Price series and methodological documentation were downloaded from federal websites and supplemented with literature scans. Principal Findings The gross domestic product implicit price deflator or the overall Personal Consumption Expenditures (PCE) index is preferable to the Consumer Price Index (CPI-U) to adjust for general inflation, in most cases. The Personal Health Care (PHC) index or the PCE health-by-function index is generally preferred to adjust total medical expenditures for inflation. The CPI medical care index is preferred for the adjustment of consumer out-of-pocket expenditures for inflation. A new, experimental disease-specific Medical Care Expenditure Index is now available to adjust payments for disease treatment episodes. Conclusions There is no single gold standard for adjusting health expenditures for inflation. Our discussion of best practices can help researchers select the index best suited to their study.

The formation of expectations, inflation, and the Phillips curve

Abstract: This paper argues for a careful (re)consideration of the expectations formation process and a more systematic inclusion of real-time expectations through survey data in macroeconomic analyses. While the rational expectations revolution has allowed for great leaps in macroeconomic modeling, the surveyed empirical micro-evidence appears increasingly at odds with the full-information rational expectation assumption. We explore models of expectation formation that can potentially explain why and how survey data deviate from full-information rational expectations. Using the New Keynesian Phillips curve as an extensive case study, we demonstrate how incorporating survey data on inflation expectations can address a number of otherwise puzzling shortcomings that arise under the assumption of full-information rational expectations.

Tail Co-movement in Inflation Expectations as an Indicator of Anchoring

Abstract: We analyze the degree of anchoring of inflation expectations in the euro area during the post-crisis period, with a focus on the time span from 2014 onwards when long-term beliefs have substantially drifted away from the policy target. Using a new estimation technique, we look at tail co-movements between short- and long-term distributions of inflation expectations, estimated from daily quotes of inflation derivatives. We find that, during 2014, average correlations between short- and long-term inflation expectations rose sharply; moreover, negative tail events impacting short-term beliefs have been increasingly channeled to long-term views, triggering both downward revisions in expectations and upward changes in uncertainty. Overall, our results signal a risk of downside de-anchoring of long-term inflation expectations.

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.

The Elusive Costs of Inflation: Price Dispersion during the U.S. Great Inflation

Abstract: A key policy question is: how high an inflation rate should central banks target? This depends crucially on the costs of inflation. An important concern is that high inflation will lead to inefficient price dispersion. Workhorse New Keynesian models imply that this cost of inflation is very large. An increase in steady-state inflation from 0% to 10% yields a welfare loss that is an order of magnitude greater than the welfare loss from business cycle fluctuations in output in these models. We assess this prediction empirically using a new data set on price behavior during the Great Inflation of the late 1970s and early 1980s in the United States. If price dispersion increases rapidly with inflation, we should see the absolute size of price changes increasing with inflation: price changes should become larger as prices drift further from their optimal level at higher inflation rates. We find no evidence that the absolute size of price changes rose during the Great Inflation. This suggests that the standard New Keynesian analysis of the welfare costs of inflation is wrong and its implications for the optimal inflation rate need to be reassessed. We also find that (nonsale) prices have not become more flexible over the past 40 years.

Asymmetric impact of oil prices, exchange rate, and inflation on tourism demand in Pakistan: new evidence from nonlinear ARDL

Abstract: This study scrutinized the asymmetric impact of oil prices, exchange rate, and inflation on tourism demand in Pakistan using [Shin, Y., Yu, B., & Greenwood-Nimmo, M. (2014) Modelling asymme...

Should We Reject the Natural Rate Hypothesis

Abstract: Fifty years ago, Milton Friedman articulated the natural rate hypothesis. It was composed of two sub-hypotheses: First, the natural rate of unemployment is independent of monetary policy. Second, there is no long-run trade-off between the deviation of unemployment from the natural rate and inflation. Both propositions have been challenged. The paper reviews the arguments and the macro and micro evidence against each. It concludes that, in each case, the evidence is suggestive, but not conclusive. Policymakers should keep the natural rate hypothesis as their null hypothesis, but keep an open mind and put some weight on the alternatives.

The Changing Transmission of Uncertainty Shocks in the U.S.

Abstract: This article investigates if the impact of uncertainty shocks on the U.S. economy has changed over time. To this end, we develop an extended factor augmented vector autoregression (VAR) model that simultaneously allows the estimation of a measure of uncertainty and its time-varying impact on a range of variables. We find that the impact of uncertainty shocks on real activity and financial variables has declined systematically over time. In contrast, the response of inflation and the short-term interest rate to this shock has remained fairly stable. Simulations from a nonlinear dynamic stochastic general equilibrium (DSGE) model suggest that these empirical results are consistent with an increase in the monetary authorities’ antiinflation stance and a “flattening” of the Phillips curve. Supplementary materials for this article are available online.

Central Bank Transparency and Independence: Updates and New Measures

Abstract: This paper reports updated measures of transparency and independence for more than 100 central banks. The indices show that there has been steady movement in the direction of greater transparency and independence over time. In addition, we show that outcomes such as the variability of inflation are significantly affected by both central bank transparency and independence. Disentangling the impact of the two dimensions of central bank arrangements remains difficult, however. In early 2012 the Federal Open Market Committee (FOMC) made known a decision to further increase the transparency of its monetary policy decisions. 1 It announced a plan to publish the predictions of members of the Board of Governors and Reserve Bank presidents of the level of short-term interest rates as well as having them describe their views of the evolution of the Federal Reserve’s investment portfolio. The Federal Reserve already published their forecasts of inflation, unemployment, and growth. In taking this additional step, it was following the central banks of New Zealand, Norway, and Sweden, which have been publishing interest rate forecasts for years. More broadly, this decision to release interest rate forecasts and portfolio outlooks was another step in the trend toward greater central ∗ The first author gratefully acknowledges financial support of TUBITAK (The Scientific and Technological Research Council of Turkey) under TUBITAK

Central Bank Communications and the General Public

Abstract: Despite the recent revolution in central bank communication, it is unclear the general public have benefitted from these enhanced central bank communications. We first analyze the growth of communication and some reasons that the public may have missed the revolution. We then discuss the desirability of greater communication with the public. The case for feasibility of such communication examines observational and experimental evidence following the recently adopted use of a layered communication at the Bank of England. We find that, while more research is needed, there are compelling reasons for central banks to continue trying to target communication at the public.

Inflation Forecasts and the New Keynesian Phillips Curve

Abstract: We examine the ability of the New Keynesian Phillips curve to explain U.S. inflation dynamics when inflation forecasts (from the Federal Reserve’s Greenbook and the Survey of Professional Forecasters) are used as a proxy for inflation expectations. The New Keynesian Phillips curve is estimated against the alternative of the hybrid Phillips curve, which allows for a backward-looking component in the price-setting behavior in the economy. The results are compared with those obtained using actual data on future inflation as conventionally employed in empirical work under the assumption of rational expectations. The empirical evidence provides, in contrast to most of the relevant literature, considerable support for the standard forward-looking New Keynesian Phillips curve when inflation expectations are measured using inflation forecasts that are observable in real time. In this case, lagged-inflation terms become insignificant in the hybrid specification. The evidence in favor of the New Keynesian Phillips curve becomes even stronger when real-time data on lagged inflation are used instead of the final inflation data used in standard specifications. Our work is closely related to the work of Roberts (1997), who used survey measures of inflation expectations in an empirical inflation model and found evidence that it is less-than-perfectly rational expectations and not the underlying structure of the economy that account for the presence of lagged inflation in empirical estimates of the New Keynesian model.

An Inflation‐Predicting Measure of the Output Gap in the Euro Area

Abstract: Using a small Bayesian dynamic factor model of the euro area, we estimate the deviations of output from its trend that are consistent with the behavior of inflation. We label these deviations the output gap. In order to pin down the features of the model, we evaluate the accuracy of real‐time inflation forecasts from different model specifications. The version that forecasts inflation best implies that after the 2011 sovereign debt crisis, the output gap in the euro area has been much larger than the official estimates. Versions featuring a secular stagnation‐like slowdown in trend growth, and hence a small output gap after 2011, do not adequately capture the inflation developments.

A Multiple and Partial Wavelet Analysis of the Oil Price, Inflation, Exchange Rate, and Economic Growth Nexus in Saudi Arabia

Abstract: This article provides a fresh insight into the dynamic nexus between oil prices, the Saudi/US dollar exchange rate, inflation, and output growth rate in Saudi Arabia’ economy, using novel Morlet’ w...

Controlling Credit: Central Banking and the Planned Economy in Postwar France, 1948–1973

Abstract: It is common wisdom that central banks in the postwar (1945–1970s) period were passive bureaucracies constrained by fixed-exchange rates and inflationist fiscal policies. This view is mostly retrospective and informed by US and UK experiences. This book tells a different story. Eric Monnet shows that the Banque de France was at the heart of the postwar financial system and economic planning, and that it contributed to economic growth by both stabilizing inflation and fostering direct lending to priority economic activities. Credit was institutionalized as a social and economic objective. Monetary policy and credit controls were conflated. He then broadens his analysis to other European countries and sheds light on the evolution of central banks and credit policy before the Monetary Union. This new understanding has important ramifications for today, since many emerging markets have central bank policies that are similar to Western Europe's in the decades of high growth.

Michelson-Morley, Fisher, and Occam: The Radical Implications of Stable Quiet Inflation at the Zero Bound

Abstract: The long period of quiet inflation at near zero interest rates, with large quantitative easing, suggests that core monetary doctrines are wrong It suggests that inflation can be stable and determi

Expected inflation and other determinants of Treasury yields

Abstract: A standard factor model is used to estimate the magnitude of inflation risk in nominal U.S. Treasury bonds. At a quarterly frequency, news about expected average inflation over a bond’s life accounts for between 10 to 20 percent of shocks to nominal Treasury yields. This result is robust statistically, stable across time, and insensitive to the number of factors used in the model. Shocks to real rates and term premia account for the remainder of shocks to nominal yields.

Tips from TIPS: the informational content of Treasury Inflation-Protected Security prices ⁄

Abstract: Treasury Inflation-Protected Securities (TIPS) are frequently thought of as risk-free real bonds. Using no-arbitrage term structure models, we show that TIPS yields exceeded risk-free real yields by as much as 100 basis points when TIPS were first issued and up to 300 basis points during the 2007–2008 financial crisis. This spread predominantly reflects the poorer liquidity of TIPS relative to nominal Treasury securities. Other factors, including the indexation lag and the embedded deflation protection in TIPS, play a much smaller role. Ignoring this spread also significantly distorts the informational content of TIPS break-even inflation, a widely used proxy for expected inflation.

Budget Deficit, Inflation and Debt Sustainability: Evidence from Turkey, 1970-2000

Abstract: We investigate the conditions from which inferences can be drawn regarding sustainability of fiscal stance on the one hand, and a long-run relationship between inflation and budget deficits on the other. These issues have assumed even greater importance in the aftermath of the collapse of the 1999 stabilization program in February 2001 that was designed to achieve sustainability in debt dynamics and produce a permanent reduction in inflation rates. The first set of findings indicates nonstationarity in the discounted debt to GNP ratio process during 1970-2000, implying an unsustainable fiscal outlook. The inference does not imply insolvency, but points to the necessity of a policy change towards fiscal austerity. The second set of findings pertaining to the long-run relationship between the inflation rate, budget deficit, and real output growth suggests two important results. The first of these is that the consolidated budget deficit does not have a long-run component unlike the inflation rate, suggesting that changes in the consolidated budget deficit have no permanent effect on the inflation rate. On the other hand, the PSBR does have a long-run component and is cointegrated with the inflation rate, which implies that the PSBR is a better indicator of fiscal deficits in comparison to the consolidated budget deficit. • We would like to thank Ismail Saglam for helpful comments and suggestions. The usual disclaimer applies.

Household Informedness and Long‐Run Inflation Expectations: Experimental Evidence

Abstract: This article uses an experiment embedded in a survey to analyze the response of consumers' long‐run inflation expectations to information about the Federal Reserve's inflation target and past inflation. On average, respondents revise forecasts toward the 2% target with either information treatment. Forecast uncertainty and heterogeneity decline with the treatments, but remain substantial. Since the information in the treatments is publicly available, these findings are consistent with models of imperfect information in which agents do not fully and continually update their information sets or incorporate all available information into their expectations. Response to treatments varies with prior informedness and with demographic characteristics.

Internet Rising, Prices Falling: Measuring Inflation in a World of E-Commerce

Abstract: The rise of ecommerce and the contrasts between online and traditional retail pricing behavior have raised questions about potential bias in CPI inflation. Using new data on online transactions, this paper shows that aggregate matched-model inflation online from 2014–2017 was more than a full percentage point lower than in the corresponding CPI. In addition, new products were tremendously important. Quantifying the net increase in number of new goods minus the exit of old goods suggests that actual inflation online may have been an additional 1.5 to 2.5 percentage points lower than indicated in matched model price indices like the CPI.

Inflation Expectations as a Policy Tool

Abstract: We assess whether central banks may use inflation expectations as a policy tool for stabilization purposes. We review recent work on how expectations of agents are formed and how they affect their economic decisions. Empirical evidence suggests that inflation expectations of households and firms affect their actions but the underlying mechanisms remain unclear, especially for firms. Two additional limitations prevent policy-makers from being able to actively manage inflation expectations. First, available surveys of firms’ expectations are systematically deficient, which can only be addressed through the creation of large, nationally representative surveys of firms. Second, neither households’ nor firms’ expectations respond much to monetary policy announcements in low-inflation environments. We provide suggestions for how monetary policy-makers can pierce this veil of inattention through new communication strategies. At this stage, there remain a number of implementation issues and open research questions that need to be addressed to enable central banks to use inflation expectations as a policy tool.

The Neo-Fisher Effect: Econometric Evidence from Empirical and Optimizing Models

Abstract: This paper investigates whether permanent monetary tightenings increase inflation in the short run It estimates, using US data, an empirical and a New-Keynesian model driven by transitory and permanent monetary and real shocks Temporary increases in the nominal interest-rate lead, in accordance with conventional wisdom, to a decrease in inflation and output and an increase in real rates The main result of the paper is that permanent increases in the nominal interest rate lead to an immediate increase in inflation and output and a decline in real rates Permanent monetary shocks explain more than 40 percent of inflation changes

The Diversity of Wage Regimes: Why the Eurozone Is Too Heterogeneous for the Euro

Abstract: Why did the transnational synchronization of wage inflations fail during the first 10 years of the euro? We analyze data from 1999 to 2008 for 12 euro members and estimate increases of nominal unit labor costs both in the overall economy and in manufacturing as dependent variables. While our analysis confirms that differences in economic growth shaped the inflation of labor costs, we add a political-institutional argument to the debate and argue that the designs of the wage regimes had an additional, independent impact. In coordinated labor regimes, increases in nominal unit labor costs tended to fall below the European Central Bank’s inflation target, while in uncoordinated labor regimes, the respective increases tended to exceed the European inflation target. Due to the stickiness of wage-bargaining institutions, the lack of the capacity to synchronize inflation is not likely to disappear in the foreseeable future.

A Smooth Exit from Eternal Inflation

Abstract: The usual theory of inflation breaks down in eternal inflation. We derive a dual description of eternal inflation in terms of a deformed Euclidean CFT located at the threshold of eternal inflation. The partition function gives the amplitude of different geometries of the threshold surface in the no-boundary state. Its local and global behavior in dual toy models shows that the amplitude is low for surfaces which are not nearly conformal to the round three-sphere and essentially zero for surfaces with negative curvature. Based on this we conjecture that the exit from eternal inflation does not produce an infinite fractal-like multiverse, but is finite and reasonably smooth.