Actual Inflation Research Articles

Readiness of the Czech Republic to Join the Euro Area

The Czech Republic has been a member of the European Union since 2004. As a Member State, it is obliged to join the euro area upon meeting all the Maastricht criteria. There is still no fixed date for adopting the single European currency. The Czech Republic is failing to meet some criteria. There are ongoing discussions about joining the euro among experts, bank representatives, politicians, entrepreneurs, representatives of the Czech Chamber of Commerce and various associations, economics students and the general public. The aim of this paper is to assess the ongoing fulfilment of the Maastricht convergence criteria in the Czech Republic and to identify the relationship between actual and perceived inflation. The paper reflects new aspects, which were generated by the recent development on financial markets during the last 2 years, including COVID-19 and Russian attack to Ukraine. Due to the fact, that not all statistics reflects recent development, some tables and charts are not reflecting this for hundred percent. The analyses carried out reveal that the only criterion that is currently met is the level of public debt (sustainability will be assessed at the time of application). Smooth adoption of the euro by the public is associated with an increased perception of inflation above actual inflation. This situation should be addressed by economic policy actors in preparation for joining the euro area. The importance of a government communication and explanation campaign was confirmed by countries in a similar position. Since February this year, Europe and the whole world have been facing a new geopolitical situation. There are voices calling for Europe to become stronger, more compact, perhaps move towards a federation, including a strengthening of the common currency’s position. Therefore, this is a highly topical issue. The final decision in the Czech Republic to start the process of adopting the euro and to set the date for joining the euro area rests with the Czech Government in cooperation with the Czech National Bank.

Is inflation caused by deteriorating inflation expectations or excessive monetary growth?

AbstractThe near‐universal practice of inflation targeting has strengthened the belief of central banks that all that is needed to control inflation is to anchor expectations with a credible inflation target. The use of Taylor rule augmented DSGE models for policy analysis and forecasting adds credence to the view that, provided inflation expectations remain stable, actual inflation will be driven by expectations. The ultimate drivers of inflation are subsidiary to the central bank operation of acting on inflation expectations for the control of inflation. This article poses the question whether inflation is caused by deteriorating inflation expectations or excessive monetary growth. It takes as its theoretical inspiration Friedman's theory of nominal income determination. We use quarterly data of one‐year‐ahead inflation expectations produced by the Bank of England, and medium‐run inflation expectations backed out of five‐year bond yields as measures of long‐term inflation expectations. To this we add actual inflation, nominal GDP, and M4 to define a four‐variable VAR. The results reveal that M4 Granger causes inflation and inflation expectations, and a variance decomposition of inflation shows that while inflation expectations help to drive inflation, after a period of between five and eight quarters money supply dominates the variance decomposition.

Is the Fisher effect asymmetric? Cointegration analysis and expectations measurement

AbstractUsing U.S. post‐war data, we investigate whether the interest rate response to inflation known as the Fisher effect could be asymmetric. The asymmetry considered is that the long‐run change in the interest rate is larger when inflation rises than when it falls. The possibility follows from behavioural hypotheses about the relationship of inflation expectations to actual inflation. Using an asymmetric cointegration approach, we find asymmetric cointegration in the Fisher effect for the post‐war period through 1979, but not subsequently. We then find that starting in 1980, a breakdown developed in the relationship between inflation expectations from surveys and actual recent inflation rates, a breakdown not accounted for by asymmetry. If the survey results approximate true expectations, then econometric testing using actual recent inflation to compute expected inflation will suffer from mismeasurement, which could explain the finding of no cointegrating Fisher effect post‐1979. The paper accounts for breakpoints and uses bootstrapping to conservatively estimate statistical significance.

Measuring trend inflation in India

Central to monetary policy is the concept of trend inflation to which actual inflation outcomes are expected to converge after short run fluctuations die out. Accordingly, the inflation target needs to be fixed in alignment with trend inflation to avoid unhinging inflation expectations and flattening the aggregate supply curve or imparting a deflationary bias to the economy. Results from a regime switching model applied to a hybrid New Keynesian Philips curve suggest a steady decline in trend inflation since 2014 to 4.1–4.3 per cent just before COVID-19 struck. This points to maintaining the inflation target at 4 per cent for India.

The efficiency of primary sovereign bond markets in Turkey: The so-called Fisher puzzle reconsidered

Many prior studies have tested the validity of the Fisher effect , with results proving controversial, regardless of the econometric models , country groups, or time spans chosen. Therefore, to solve the so-called Fisher puzzle, this study aims to reveal whether current interest rates , which are set in the primary bond markets, carry information about actual inflation rates when the conventional direction of causation is reversed, using monthly Turkish data from the 2010–2018 period. In line with our expectations, we found a significant long-run coefficient (0.92), which indicates that changes in interest rates are rational expectations of changes in current inflation rates, though a full Fisher effect was not observed. Moreover, the short-run coefficients were also significant, which highlights the fact that the unanticipated movements in these variables act as early signals of persistent future price-level changes. Therefore, monetary authorities should respond rapidly in the short run using rules-based proactive policies to curb long-run volatilities, which also restrict the power of estimations, as market participants tend to assign higher risk premiums to bond yields when prices are expected to surge.

An Analysis of the Effectiveness of Japanese Monetary Policy Through a Statistical Mathematical Approach: a Simultaneous Equations Model (SEM)

Abstract In this paper, the authors offer a policy analysis about the problem of the effectiveness of the Japanese monetary policy in contrasting the last three main crises that the country has experienced from the 1990s to today: that of the Lost decade, that of 2008 and that caused by the pandemic of COVID-19. To this end, they present a small equilibrium model consisting of a system of simultaneous equations (SEM) identified by solving the consumption optimization problem of the representative household and the profit optimization problem of the representative firm. The SEM was estimated using the three-stage least squares method (3SLS) quarterly historical series, at constant prices, in the sample period Q1 1994 - Q2 2020. The result achieved by the authors is that the monetary policy has been inadequate to stimulate the per capita GDP growth rate, the private consumption, the investment, the actual inflation and the expected inflation. JEL classification numbers: C30, C40, C51, C60, E51. Keywords: Mathematical and statistical methods, Mathematical applications for Economics, Japanese monetary policy, Quantitative easing, Simultaneous equations model.

Why do we think that inflation expectations matter for inflation? (And should we?)

Economists and economic policymakers believe that households’ and firms’ expectations of future inflation are a key determinant of actual inflation. A review of the relevant theoretical and empirical literature suggests that this belief rests on extremely shaky foundations, and a case is made that adhering to it uncritically could easily lead to serious policy errors.

Оценка инфляционных ожиданий на основе интернет-данных

This article provides assessments of inflation expectations of Russian internet users based on the posts of the social media Vkontakte and Google Trends search queries during 2014–2021. We collect posts from news communities and search queries to measure inflation expectations using inflation‐related regular expressions. Inflation expectations based on internet data are highly correlated with actual inflation and reflect household concerns about price increases during 2014–2021. Granger causality tests have shown both measures of internet user inflation expectations can be potential predictors of actual inflation. An econometric analysis of the New Keynesian Phillips Curve is carried out using VAR from February 2015 to December 2021. The results suggest that an increase in inflation expectations is consistent with an increase in actual inflation and a tightening of monetary policy.

ANALYSING THE EXCHANGE RATE-INFLATION NEXUS: EVIDENCE FROM MAURITIUS

This paper examines the degree and speed of exchange rate passthrough (ERPT) to the inflation rate in Mauritius from 1980 to 2016 using dynamics regression analysis. Results reveal that the long-run ERPT elasticity to domestic inflation is incomplete and low. However, no such relationship is discovered in the short run. The speed of adjustment of actual inflation to its long-run equilibrium level is quite high and it takes approximately two years to attain that level. From a policy point of view, domestic inflation can be tamed by tightening the domestic money supply and maintaining exchange rate stability in the long run

Evaluating Risks of Hyperinflation Post COVID-19 Pandemic

The COVID-19 pandemic represented a logical Catch 22 scenario in the world of financial economics. The pandemic saw a sudden and unanticipated plunge in Money Velocity, Consumer Confidence, Employment, and Industrial Output. At the same time, due to fiscal and monetary stimulus measures in the form of quantitative easing and stimulus checks, the US saw an unanticipated rise in its Money Stock. With new waves of the virus and long-lasting labor shortages, a possible surplus liquidity scenario might arise. The United States faces a potentially high inflation rate scenario in such a case. This study draws insights from similar historical precedents and aims to model inflation as a function of macroeconomic variables: unemployment, money stock, money velocity, and industrial production. The study concludes that current percentage inflation already exceeds forecast estimates in the absence of a pandemic scenario through an OLS model. Recognizing transmission lags from exogenous variables to the target variable, an ARDL model is employed, which can incorporate differing leads/lags. Both the models predicted a lower inflation rate in the absence of Pandemic and Government Intervention than the actual inflation rate. This was deemed prima facie evidence that inflationary pressure from an increase in Money supply overpowered decreases in employment and money velocity. It was posited that when the economy reopens, this effect may further worsen due to the theoretically direct relationship between velocity, employment, and inflation. The study cautions runaway inflation, akin to Latin America’s failed trials in Modern Monetary Theory type policies and many instances enshrined in history.

Appraising Inflation Expectations in Russia in the Period of 2015–2020

The paper reviews techniques for measuring inflation expectations in Russia in the period from 2015 to 2020. In the tree methods under review, which comprise adaptive expectations, stock exchange indicators, and sociological surveys of the Bank of Russia, the authors found both common and distinguishing features. All the reviewed methods demonstrated that inflation expectations remain high in Russia despite the relatively stable rates of the last few years on the level of 4–5 %. When estimated by the adaptive method in 2015–2020, the inflation expectations stayed between 0.5 and 6.2 %. The adaptive expectations allow a simplified approach to estimation as they depend on the level of the previous period’s inflation and do not react to economic shocks in the short term. The method of stock exchange indicators estimated the inflation expectations dynamics from 2.5 up to 8.6 %. Thanks to the opportunity of daily monitoring inflation expectations, this method is better at analyzing factors that impact the sentiments of market agents. A comparative analysis of approaches to estimating inflation expectations revealed that expectations according to sociological surveys of the Bank of Russia happened to surpass the actual inflation. In the period 2015–2020 the level of inflation expectations varied between 8 and 17 %, which is much higher than Russia’s inflation level.l.

The dynamics of survey-based household inflation expectations in India

PurposeThe author analyzes households' inflation expectations data for India, collected quarterly by the RBI for more than a decade. The contribution of this paper lies in two folds. First, this study examines the relationship between relatively recent inflation expectations survey of households (IESH) and the actual inflation for India. Secondly, the author employs a structural VAR with the time period 2006 Q2 to 2020 Q2 on inflation expectation survey data of India. A short-term non-recursive restriction is imposed in the model in order to capture the simultaneous co-dependence causal effect of inflation expectation and realized inflation.Design/methodology/approachThis paper studies the dynamic behavior of inflation expectations survey data in two folds. First, the author analyzes the time series property of the survey data. The author begins with testing the stationarity property of the series, followed by the casual relationship between the expected and actual inflation. The author further examines the short-run and long-run behavior of the IESH with actual inflation. Employing autoregressive distributed lag and Johansen co-integration, the author tested if a long-run relationship exists between the variables. In the second approach, the author investigates the determinants of inflation expectations by employing a non-recursive SVAR model.FindingsThe preliminary explanatory test reveals that inflation expectation is a policy variable and should be used in monetary policy as an instrument variable. The model identifies the price puzzle for India. The author finds that the response of inflation to a monetary policy shock is neutral. The results also indicate that the expectations of the general public are self-fulfilling.Originality/valueIESH has only commenced from September 2005, hence is relatively new as compared to other survey in developed countries. Being a new data set so far, the author could not locate any study devoted in analyzing the behavior of the data with other macroeconomic variables.

Shortageflation 3.0: War economy – State socialism – Pandemic crisis

Abstract The crisis caused by the coronavirus pandemic has prompted governments and central banks to take unorthodox measures aimed at protecting the standard of living of people and sustaining the production and service activities of companies. The policy of aggressively increasing the supply of money has entailed a significant rise in the budget deficit and public debt. It is important to consider the extent of its impact on the escalation of inflation processes and to formulate suggestions regarding the economic policy. Inflation is already higher than the official indicators show it, because it is partly suppressed. The increase in the general price level does not fully reflect the actual inflation rate. We are dealing with shortageflation – the simultaneous occurrence of price inflation and repressed inflation accompanied by shortages. It is methodologically interesting to compare this current phenomenon, 3.0, with the suppression of inflation in the war economy, 1.0, and in the economies of state socialism, 2.0. Such comparisons highlight not only the similarities of these processes but also the differences resulting from the specificity of responses of households and businesses. This paper discusses five channels of unloading excessive savings, indicating the most beneficial ones from the point of view of sustainable economic development in the post-pandemic future. It is particularly important to prompt the conversion of compulsory savings into voluntary savings, and at the same time, to stimulate the transformation of the inflationary monetary reserves into the effective demand expanding the use of existing production capacities and investments creating new capacities.

Policy errors and business cycle fluctuations: Evidence from an emerging economy

In the immediate aftermath of the global financial crisis, the monetary policy in India became accommodative as in other major economies, but the policy subsequently turned highly contractionary despite falling inflation, which we characterize as policy errors. Government expenditure also had similar pattern. This paper therefore estimates a medium scale New Keynesian model (with earnings and assets based collateral constraint) to explore the impact of such policy errors on Indian business cycles, capturing the prevailing narrative on both monetary and fiscal policies along with the actual inflation scenario. Our smoothed estimates of mark-up, productivity, interest rate and government expenditure shocks mimic the actual transition of the economy, with both policy shocks moving together in a similar pattern in the post crisis period. We find that the interest rate policy was highly contractionary during 2013-2016 which led to significantly lower output. We rationalize that if supply side shocks (adverse productivity or mark-up) dominate, such policy errors tend to occur, suggesting that policy makers need to pay attention to the sources of inflation in a developing economy while setting demand-management policies. Given the current pandemic as more of a adverse supply shock, similar policy errors are likely to occur if interest rate responds to this type of inflationary shocks.

Decreases in Radiation Oncology Medicare Reimbursement Over Time: Analysis by Billing Code

Decreases in Radiation Oncology Medicare Reimbursement Over Time: Analysis by Billing Code

Shortageflation 3.0: War economy — state socialism—pandemic crisis

The crisis caused by the coronavirus pandemic has prompted governments and central banks to take unorthodox measures aimed at protecting the standard of living of people and sustaining the production and service activities of companies. The policy of aggressively rising the supply of money has entailed a significant increase in the budget deficit and public debt. It is important to consider the extent of its impact on the escalation of inflation processes and to formulate suggestions regarding the economic policy. Inflation is already higher than the official indicators show it, because it is partly suppressed. The increase in the general price level does not fully reflect the actual inflation rate. We are dealing with shortageflation — the simultaneous occurrence of price inflation and repressed inflation accompanied by shortages. It is methodologically interesting to compare this current phenomenon, 3.0, with the suppression of inflation in the war economy, 1.0, and in the economies of state socialism, 2.0. Such comparisons highlight not only the similarities of these processes but also the differences resulting from the specificity of responses of households and businesses. This article discusses five channels of unloading excessive savings, indicating the most beneficial ones from the point of view of sustainable economic development in the post-pandemic future. It is particularly important to prompt the conversion of compulsory savings into voluntary ones and at the same time to stimulate the transformation of inflationary monetary reserves into the effective demand expanding the use of existing production capacities and investments in creating new capacities.

Can Recurrent Neural Networks Predict Inflation in Euro Zone as Good as Professional Forecasters?

This paper investigates whether a specific type of a recurrent neural network, in particular Jordan neural network (JNN), captures the expected inflation better than commonly used feedforward neural networks and traditional parametric time-series models. It also considers competing survey-based and model-based expected inflation towards ex-post actual inflation to find whose predictions are more accurate; predictions from survey respondents or forecasting modelers. Further, it proposes neural network modelling strategy when dealing with nonstationary time-series which exhibit long-memory property and nonlinear dependence with respect to lagged inputs and exogenous inputs as well. Following this strategy, overfitting problem was reduced until no improvement in forecasting accuracy of expected inflation is achieved. The main finding is that JNN predicts inflation in euro zone quite accurately within forecasting horizon of 2 years. Regarding rational expectation principle we have found a set of demand-pull and cost-push inflation characteristics as exogenous inputs which helps in reducing overfitting problem of recurrent neural network even more. The sample includes euro zone aggregated monthly observations from January 2000 to December 2019. The results also confirm that inflation expectations obtained from JNN are consistent with Survey of professional forecasters (SPF), and thus, monetary policy makers can use JNN as a complementary tool in shortcomings of other inflation expectations measures.

Shortageflation 3.0: Воєнна економіка – державний соціалізм – пандемічна криза

The crisis caused by the coronavirus pandemic has prompted governments and central banks to take unorthodox measures aimed at protecting the standard of living of people and sustaining the production and service activities of companies. The policy of aggressively rising the supply of money has entailed a significant increase in the budget deficit and public debt. It is important to consider the extent of its impact on the escalation of inflation processes and to formulate suggestions regarding the economic policy. Inflation is already higher than the official indicators show it, because it is partly suppressed. The increase in the general price level does not fully reflect the actual inflation rate. We are dealing with shortageflation – the simultaneous occurrence of price inflation and repressed inflation accompanied by shortages. It is methodologically interesting to compare this current phenomenon, 3.0, with the suppression of inflation in the war economy, 1.0, and in the economies of state socialism, 2.0. Such comparisons highlight not only the similarities of these processes but also differences resulting from the specificity of responses of households and businesses. This article discusses five channels of unloading excessive savings, indicating the most beneficial ones from the point of view of sustainable economic development in the post-pandemic future. It is particularly important to prompt the conversion of compulsory savings into voluntary savings and at the same time to stimulate the transformation of the inflationary monetary reserves into the effective demand expanding the use of existing production capacities and investments creating new capacities.

Heterogeneous firm dynamics and price setting behavior

Empirical studies in reset price inflation find it difficult to justify volatile actual inflation while maintaining the volatility of reset price inflation at a reasonably low level. Firm's price setting behavior plays an important role in generating volatility of inflation. This paper employs an innovative approach by introducing firm heterogeneity into a micro-founded Calvo-type partial equilibrium model to study price setting behavior and demonstrates that granularity is a potential solution to the reset price inflation puzzle. Granular effects are also shown to be robust under different sets of parameter values.

Why Do We Think That Inflation Expectations Matter for Inflation? (And Should We?)

<ns2:p>Economists and economic policymakers believe that households' and firms' expectations of future inflation are a key determinant of actual inflation. A review of the relevant theoretical and empirical literature suggests that this belief rests on extremely shaky foundations, and a case is made that adhering to it uncritically could easily lead to serious policy errors.</ns2:p>