Abstract
This article examines the relationship between the real effects of inflation and its level in countries with frequent episodes of high inflation. The real effects are computed as asymmetric impulse responses of output to inflation separately in the regimes with different signs of the differences between the expected inflation and the predicted output-neutral inflation. It is found that, with the increase in inflation, such effects increase in the regime with the positive sign, relatively to the effects in the regime with the negative sign. It is also shown that this finding is valid for most countries with high inflation episodes, where inflation is greater than 4.8% for at least 25% of quarterly observations. This leads to a simple policy prescription that, in economies with frequent high inflation episodes, anti-inflationary monetary decisions are least damaging for output if undertaken in the periods when the difference between the expected and output-neutral inflation is negative.
Highlights
Investigation of the nature and strength of the relationship between inflation and the real sphere is, so far, not close to being conclusive
It is shown that this finding is valid for most countries with high inflation episodes, where inflation is greater than 4.8% for at least 25% of quarterly observations
This leads to a simple policy prescription that, in economies with frequent high inflation episodes, anti-inflationary monetary decisions are least damaging for output if undertaken in the periods when the difference between the expected and output-neutral inflation is negative
Summary
Investigation of the nature and strength of the relationship between inflation and the real sphere is, so far, not close to being conclusive. Strong positive correlation between the differences in these cumulative impulse responses and the logarithm of the 0.75th quantile of inflation, measuring the magnitude of high inflation episodes, has been found This leads to the conclusion that, for a country with a history of high inflation episodes, identification of the forward-looking inflation regimes is relevant for undertaking monetary policy decisions. Further on it outlines results of the impulse response estimation and presents more detailed results for three benchmark countries: Indonesia, Malaysia and Pakistan It contains the main empirical results of the article, which is evidence of significant positive correlation between the magnitude of frequent high inflation and the cumulative balances of inflationary real effects from shocks in different forward-looking inflation regimes.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
