THE IMPACT OF EXCHANGE RATE SHOCKS ON INFLATION EXPECTATIONS IN TÜRKIYE

From 1996 to 2016, Brazil faced great fluctuations in both its exchange and interest rates and simultaneously a huge growth of its agriculture has taken place. Examining the literature that deals with the relationships among these three variables (interest rate, exchange rate and agriculture GDP) we verified that monetary and exchange shocks can affect directly and/or indirectly (through relative prices) the agriculture GDP. However, these effects can be coincident or contrary between them. What actually happened in Brazil from 1996 to 2016? This article aimed to access the direct and indirect effects of monetary and exchange rate shocks on Brazil´s agriculture GDP taking into consideration years ranging from 1996 thru 2016. Using quarterly data for the 1996-2016 period, autoregressive vector models (VAR and VEC) were estimated. The exchange rate and monetary shocks were analyzed considering three different interest rate types, namely: the current Brazil´s Federal Funds Rate (Nominal SELIC rate), real interest rate of agricultural loans, and ex-ante real interest rate. We also analyzed the effect of the exchange rate separately on prices paid and on prices received by the agriculture (both make up the relative prices of agriculture) using an ARDL (Distributed Lag Self-Regressive Model) model with monthly data. Our econometric results revealed that both direct and indirect effects of monetary shocks were negative on the agriculture growth while the direct and indirect effects of exchange rate shocks were mutually contradictory themselves on the Brazil´s agriculture GDP. Because of the technical changes that have taken place during the 2000s and the 2010s, which turned some of the most representative crops more dependent on imported inputs, and the hedging behavior that the firms have adopted during the first two decades of the 21st century, which protects them from exchange oscillations, the agricultural sector lost sensitivity to the exchange rate variations in some extent. Regarding policy implications, it could be said that monetary policy can be efficient in the promotion of the agricultural sector, and, in fact, Brazilian government has been doing such through the rural credit subsidized interest rate. Exchange policy, on the other hand, proved to be inefficient in favoring the agriculture, or, in other words, the government can freely exercise exchange policy without regards to harm the agricultural sector.

This paper introduces wavelet analysis as a tool for investigating the anchoring of inflation expectations in the United States. We show that the anchoring of inflation expectations varies for different groups of economic agents and changes across time and frequency. For consumers, we confirm significant lead-lag relationships between short- and long-term inflation expectations at medium frequencies of one to four years of scale, thus suggesting that short-term inflation expectations had fed into long-term inflation expectations over the crisis period. However, no such relationship is found for professional forecasters. These results indicate that long-term inflation expectations were de-anchored during the crisis period for consumers but not for professional forecasters. Although consumers’ long-term inflation expectations have been re-anchored since 2014 at medium frequencies, we find signs of de-anchoring at higher time scales of approximately eight years.

The impact of guidance, short-term dynamics and individual characteristics on firms’ long-term inflation expectations

Inflation expectations in the wake of the war in Ukraine

We analyse the empirical effects of credit easing and quantitative easing on inflation expectations and exchange rates. Both monetary policy strategies are summarised in measures for composition and size of the central bank balance sheet and are included in a VAR model. The results show that changes in balance sheet size had positive, albeit weak effects on inflation expectations in Japan, while the effects were negligible in the euro area. By contrast, an increasing balance sheet size is associated with reduced short-term inflation expectations in the US and UK, pointing at negative signalling effects. Shocks to balance sheet size or composition have no substantial effects on long-term inflation expectations in the euro area, US and UK. An expanding balance sheet size is associated with a depreciation of the euro, pound sterling and Japanese yen.

This chapter examines whether the effects of a positive inflation expectations shock differ from those of an adverse aggregate supply shock. This includes assessing the role of positive aggregate demand shock and comparing it to those of the positive inflation expectations shock and an adverse aggregate supply shock. Evidence indicates that the concurrence of the adverse supply shocks and positive inflation expectations shocks can have devastating effects on economic activity. The repo rate is adjusted aggressively to a positive aggregate demand shock. This aggressive increase in the repo rate to a demand shock translates into a quick decline in the response of inflation expectations. Financial market participants do indeed believe that the monetary policy authority deals decisively with positive aggregate demand shocks. Hence, monetary policy conduct may have earned credibility in dealing with demand-driven inflationary shocks. But the absence of demand pressures plays a limited role in mitigating the inflationary effects of supply shocks and inflation expectations.

This paper presents a comprehensive examination of the determination and evolution of inflation expectations, with a focus on emerging market and developing economies (EMDEs). The results suggest that long-term inflation expectations in EMDEs are not as well anchored as those in advanced economies, despite notable improvements over the past two decades. Indeed, in EMDEs, long-term inflation expectations are more sensitive to both domestic and global inflation shocks. However, EMDEs tend to be more successful in anchoring inflation expectations in the presence of an inflation targeting regime, high central bank transparency, strong trade integration, and a low level of public debt.

Long-term inflation expectations taken from the Survey of Professional Forecasters are a major source of information for monetary policy. Unfortunately, they are published only on a quarterly basis. This paper investigates the daily information content of inflation-linked swap rates for the next survey outcome. Using a mixed data sampling approach, we find that professionals account for the daily dynamics of inflation swap rates when they submit their long-term inflation expectations. We propose a daily indicator of professionals’ inflation expectations that outperforms alternative indicators that ignore the high-frequency dynamics of inflation swap rates. To illustrate the usefulness of the new indicator, we provide new evidence on the (re-)anchoring of U.S. inflation expectations.

PurposeThe purpose of this paper is to evaluate selected West African currencies/US dollar exchange rates for the evidence of volatility spillover. Specifically, the paper examines West African CFA franc, Gambian dalasi and Nigerian naira exchange rates in relation to the USD, for any evidence of shock and volatility spillover.Design/methodology/approachThe author employs multivariate GARCH (1,1)–BEKK model which enables the evaluation of the interaction within the volatility of two or more series because of its capability to detect volatility spillover among time series observations, as well as the persistence of volatility within each series.FindingsThe major findings of this study are as follows: there is evidence of volatility clustering in West African CFA franc, Gambian dalasi and Nigerian naira exchange rates in relation to the USD. There is evidence of bi-directional shock and volatility spillover between the Nigerian naira and West African CFA franc/USD exchange rates, and uni-directional shock spillover from the Gambian dalasi to the West African CFA franc/USD exchange rates. There is, however, no evidence of exchange rate shock and volatility spillover between Nigerian naira and Gambian dalasi.Originality/valueAlthough considerable literature exists on the volatility of exchange rate in West Africa and comparative analysis of exchange rates volatility in few countries of West Africa, there is absence of empirical studies on exchange rate volatility spillover among countries in the region. Since containing exchange rate volatility is one of the major objectives of monetary policy, understanding the nature and direction of exchange rate volatility spillover would propel formulation exchange rate policies that would minimise exchange rate uncertainty and entrench sustainable development. In addition, the nature of exchange rate volatility spillover between West African countries would provide basis for international traders and foreign portfolio investors to develop effective strategies for hedging against exchange rate shocks that are propagated across countries by designing appropriate risk management techniques.

This paper summarises the findings of the Eurosystem’s Expert Group on Inflation Expectations (EGIE), which was one of the 13 work streams conducting analysis that fed into the ECB’s monetary policy strategy review. The EGIE was tasked with (i) reviewing the nature and behaviour of inflation expectations, with a focus on the degree of anchoring, and (ii) exploring the role that measures of expectations can play in forecasting inflation. While it is households’ and firms’ inflation expectations that ultimately matter in the expectations channel, data limitations have meant that in practice the focus of analysis has been on surveys of professional forecasters and on market-based indicators. Regarding the anchoring of inflation expectations, this paper considers a number of metrics: the level of inflation expectations, the responsiveness of longer-term inflation expectations to shorter-term developments, and the degree of uncertainty. Different metrics can provide conflicting signals about the scale and timing of potential unanchoring, which underscores the importance of considering all of them. Overall, however, these metrics suggest that in the period since the global financial and European debt crises, longer-term inflation expectations in the euro area have become less well anchored. Regarding the role measures of inflation expectations can play in forecasting inflation, this paper finds that they are indicative for future inflationary developments. When it comes to their predictive power, both market-based and survey-based measures are found to be more accurate than statistical benchmarks, but do not systematically outperform each other. Beyond their role as standalone forecasts, inflation expectations bring forecast gains when included in forecasting models and can also inform scenario and risk analysis in projection exercises performed using structural models. ...

Does a successful disinflation contribute to the anchoring of inflation expectations? We provide novel survey evidence on the dynamics of euro area firms' inflation expectations during the disinflation episode since 2022. We show that firms' short-term inflation expectations declined steadily towards the inflation target as the disinflation progressed. However, we also document a thick tail in longer-term inflation expectations, substantial disagreement about the inflation outlook, and an increased sensitivity of longer-term inflation expectations to short-term inflation expectations. These findings suggest that it may take more time to bring inflation expectations fully in line with central bank objectives.

Does a successful disinflation contribute to the anchoring of inflation expectations? We provide novel survey evidence on the dynamics of euro area firms’ inflation expectations during the disinflation episode since 2022. We show that firms’ short-term inflation expectations declined steadily towards the inflation target as the disinflation progressed. However, we also document a thick tail in longer-term inflation expectations, substantial disagreement about the inflation outlook, and an increased sensitivity of longer-term inflation expectations to short-term inflation expectations. These findings suggest that it may take more time to bring inflation expectations fully in line with central bank objectives.

We shed new light on the anchoring of long-term euro area inflation expectations since the crisis by using micro evidence from a new survey at high (weekly) frequency. We find that long-term inflation expectations remained well anchored to the ECB’s inflation aim, which has acted as a focal point. By contrast, we find no evidence that professional forecasts (reported by Consensus Economics) acted as focal points. But there are subtle signs of long-term inflation expectations not being perfectly well-anchored. Using measures based on the distribution of inflation expectations from a quarterly survey, namely uncertainty based on the full distribution, the probability of expected long-term inflation lying between 1.5% and 2.5%, and the effect of short-term on long-term deflation risk, we find that long-term euro area inflation expectations have remained well-anchored, and have become better-anchored between 2011 and 2018.

The understanding of symmetrical or asymmetrical effects of exchange rate volatility improves the effectiveness of macroeconomic management policies. This study examines the long-run asymmetrical effects of exchange rate volatility on real demand for money in Zimbabwe, using monthly data from January 2018 to September 2020. Exchange rate shocks are calculated by decomposing exchange rate volatility measure into positive and negative components to examine their short-run and long-run effects and to determine whether the long-run effects of the components of exchange rate movements are symmetrical or asymmetrical. The linear ARDL and the non-linear ARDL models are estimated. The study employs the F-bounds test to confirm the longrun relationship and the Wald test for the asymmetrical effect. The results show that exchange rate depreciation in Zimbabwe has symmetrical effects on real demand for money. Thus, exchange rate policies in Zimbabwe should assume linearity in the passthrough effects on real demand for money. JEL Classification: E41; E52; E6

The dynamic impact of macroeconomic news on long-term inflation expectations