The Politics of Inflation

Heaven or Earth? The Evolving Role of Global Shocks for Domestic Monetary Policy

Global and Regional Business Cycles - Shocks and Propagations

Heaven or Earth? The Evolving Role of Global Shocks for Domestic Monetary Policy

Business cycles are increasingly driven by global shocks, rather than the domestic demand shocks prominent in earlier decades, posing challenges for central banks seeking to meet domestic mandates and communicate their policy decisions.This paper analyzes the evolving influence and characteristics of global and domestic shocks in advanced economies from 1970-2024 using a new FAVAR model that decomposes movements in interest rates, inflation, and output growth into four global shocks (demand, supply, oil, and monetary policy) and three domestic shocks (demand, supply, and monetary policy).We find that the role of global shocks has increased sharply over time and that their characteristics differ from those of domestic shocks across multiple dimensions.Compared to domestic shocks, global shocks have a larger supply component, higher variance, more persistent effects on inflation, and are more asymmetric (contributing more to tightening than to easing phases of monetary policy).As global supply shocks have become more prominent, central banks have also been less willing to "look through" their effects on inflation than for comparable domestic shocks.The distinct characteristics and rising influence of global shocksparticularly global supply shocks-have significant implications for modeling monetary policy and designing central bank frameworks.

Food price volatility and household food security: Evidence from Nigeria

This paper studies commodity price cycles and their underlying drivers using a dynamic factor model. The study employs a sample of 39 monthly commodity prices over 1970:01 to 2019:12. The analysis identifies global and group–specific cycles in commodity markets and includes them in a structural vector autoregressive model together with measures of global economic activity and global inflation, to disentangle their response to global demand, global supply, and commodity market-specific shocks. The findings reveal the following main results. (i) There exists a global cycle in commodity markets that accounts for an increasing fraction of co-movement in commodity prices over the past two decades, particularly for energy, metals, and precious metals. (ii) The results are heterogeneous across groups of commodities, with group-specific commodity cycles existing for grains and precious metals over the full sample period, 1970–2019. Metal and energy prices exhibit within-group synchronization over 1970–99; however, in recent years, their movements have become increasingly aligned with the global business cycle. (iii) Since 2000, the global commodity cycle is largely driven by global supply shocks, such as rapid productivity growth in emerging markets and developing economies, which increase demand for commodities. (iv) The large price spikes observed during the two most prominent commodity market boom-bust episodes of the past half-century (1972–74 and 2006–08) are driven additionally by shocks that are orthogonal to global economic activity such as shifts in speculative demand for commodities.

This article investigates the existence of a dynamic link between oil prices and stock market returns. A vector autoregressive model is estimated for Portugal, a small open non-producer economy. Results show that none of the three types of oil price shocks addressed – global supply shocks, global demand shocks for all industrial commodities and precautionary demand shocks – affect Portuguese stock market returns.

The purpose of this paper is to examine the effectiveness of monetary and fiscal policy instruments, to determine the level of influence of monetary and fiscal factors on economic growth, as well as to justify ways for improving the effectiveness of monetary and fiscal policy coordination. Insufficient coordination of monetary and fiscal policies entails devastating economic consequences. The critical analysis of scientific publications proved that today the coordination of monetary and fiscal policies depends on the degree of balanced regulation of interest rates and inflation control. The research uses a NARDL model to capture mainstream trends in the influence of monetary and fiscal factors, as well as in the empirical study of their coordination. According to the estimations it was established that the weighted average rate of NBU instruments is absorbed to a greater extent in the monetary component of coordination, the system of managing the internal public debt – in the fiscal component. The participation of monetary authorities in the management of the national internal debt remains a debatable issue today. It is proved that the process of coordination of monetary and fiscal policies is influenced by the state of Ukraine’s economy during the war.Despite the difficult political and economic situation in Ukraine, it is necessary to focus on improving the coordination of monetary and fiscal policies. In particular, the significant contribution of the NBU in financing the state budget deficit due to their purchase of government bonds needs to be resolved. Strengthening the role of macroprudential policy in the coordination of monetary and fiscal policies, one of the goals of which is to counter the emergence of a systemic crisis; formation of a clearly developed coordination strategy, which would be based on clearly defined goals, set tasks on the basis of selected methods and instruments for their achievement.

The formulation of economic policy in the USA, Japan and Europe (led by West Germany) in the first half of the 1980s can best be characterised as a non-co-operative policy game. Following the second sharp increase in oil prices in 1979–80 (OPEC-II) the US responded with a combination of easy fiscal and tight monetary policy. Fiscal policy was supposed to protect jobs and therefore minimise the deflationary effects of the oil price rise, while monetary policy was aimed at keeping inflation down by minimising the inflationary consequences of the increase in the price of oil. The success of the policy depended to a large extent on the ability of the Fed to cause a dollar appreciation, thereby exporting US inflation to the rest of the world. Europe, and to a lesser extent Japan, responded to the US policy mix by following tight fiscal and tight monetary policy. This was largely due to the strong German anti-inflationary bias in policy formulation and the disillusion in other European countries with the success of more accommodative policies in view of the experience of OPEC-I. The 1980s, in particular the first half of the decade, were characterised by very high nominal and real interest rates in the world, an unprecedented appreciation of the dollar, very high levels of unemployment in Europe, and the creation of the huge current account and budget deficits (the ‘twin deficit’) in the USA.

Global geopolitical tensions have increased considerably in recent years. This has affected the economies primarily via prices on commodities. As a result, global inflation has risen in the aftermath of geopolitical shocks. Given the higher energy and food price shares in the consumer basket, Greek inflation has also risen significantly. Historically speaking, Greece has repeatedly experienced periods of inflationary pressure. Over the past 50 years, global supply-side shocks have triggered cost-push inflation, which was often accommodated by expansionary policies. This paper analyses the historical trajectory of inflationary shocks in Greece, aiming to document inflation trends from the early 1970s to the present. In particular, it identifies the underlying forces that have driven inflation, which in turn entails an examination of both domestic demand and supply shocks, as well as global supply shocks. We find that there is a direct interplay between domestic demand and supply shocks, global supply shocks driven by geopolitical tensions and Greek headline inflation.

This paper measures the real estate market risk in China by embedding the relative volatility of stock returns in the real estate industry into the Marginal Expected Shortfall Model. Subsequently, we examine the effectiveness of the coordination of monetary and macroprudential policies in preventing real estate market risk based on panel data from cities. Additionally, we investigate the impact of local government’s land finance behavior on the effectiveness of the coordination of these two policies. The results show that the tightening monetary policy can strengthen the restraining effect of macroprudential policy on real estate market risk. From the perspective of risk prevention in the real estate market, whether it is a quantitative or price-based monetary policy tool, land finance behavior can weaken the regulatory effect of the coordination of monetary and macroprudential policies. Moreover, this weakening effect is more pronounced in the regions with high vertical fiscal imbalance and intense economic competition. One of the important policy implications is that regulatory authorities should strengthen the coordination among local fiscal behavior, monetary policy, and macroprudential policy. This will enhance the effectiveness of the coordination of monetary policy and macroprudential policy to prevent risks in the real estate market.

This paper examines the impact of Chinese economic growth on the real price of crude oil based on monthly time series data from 1992:01 to 2017:06 using structural vector auto-regression (SVAR). The variables of the SVAR model are global crude oil production, index of global economic activity, China’s real GDP and real price of crude oil. Due to a break in the real price of oil series during the 2008 global financial crisis, the data is divided into two intervals. The results for the period prior to the 2008 crisis show that global demand shocks had a significant impact, while shocks from Chinese economic activity and global oil supply were insignificant. However, the results for the post 2008 period demonstrate that demand shocks of the Chinese economy have a significant but delayed impact, while global supply shocks have an immediate impact. The findings indicate a new regime after the 2008 crisis with a resurgence of a supply driven crude oil market structure that is influenced by Chinese economic performance.

This paper develops a dynamic analysis of the trade balance to investigate the roles of supply and demand shocks. It also introduces global shocks in the analysis to take into account the comovement of income across countries. The results, based on the long-run historical data and a structural VAR analysis, show that, in the U.K., Australia, Canada, and Sweden, domestic and global supply shocks, while dominant causes in long-term and cyclical changes in output, are unimportant for the trade balance. The trade balance is explained mostly by shocks that cause transitory changes in income. Transitory income shocks cause income and the trade balance to move in opposite directions in all countries except Sweden. The countercyclical behavior of the trade balance seems to be a robust feature in the U.K. and Canada but not in the smaller economies of Australia and Sweden.

Background: The population of any country plays a crucial role in its economic, social, cultural, and political development. A young population enhances the workforce and economic dynamism of the country. Changes in lifestyle and a series of population, economic, and political policies in recent years have exposed Iran to the risk of population aging and demographic warnings from social researchers. The situation is such that population experts unanimously believe that if the current trend of increasing births and population growth continues, the country will face a major population crisis in the next 30 years. The present study examined the challenges and policy solutions in the field of Iran's population, considering a densely populated future. Considering the age pyramid between 1990 and 2000, Iran has experienced significant population growth, providing an effective and active workforce for the country. According to statistical models, Iran's population is projected to age significantly by 2030 and 2050. The complex issue of increasing fertility and population growth requires comprehensive and balanced measures. Promoting public awareness, financial support for families, social security provision, gender balance, housing facilities, population research, rural development, and collaboration with non-governmental organizations can be considered appropriate policies to increase fertility in Iran. The population issue should not be politicized, with some opposing and others supporting it; everyone should collaborate to address this significant gap. Considering the serious concerns and warnings of the Supreme Leader regarding population aging and the expressed concerns about the decline in population and the inadequacy of the current situation, policies for increasing fertility and population growth are on the agenda. However, all organizations, agencies, and individuals who can contribute to the realization of these policies must actively and seriously participate.

Oil shocks and the U.S. economy in a data-rich model