Anchor Inflation Expectations Research Articles

Threshold inflation and relative price variability – a proposal for inflation targeting in Lebanon

PurposeThe study investigates the impact of inflation on the variability of relative prices in the context of Lebanon.Design/methodology/approachUnlike the traditional method, which relies on the variance of cross-sectional price changes measured at specific points in time to gauge the variability in relative prices, we employ a more appropriate approach. Under this approach, we capture the dispersion in relative prices by estimating how widely (or closely) a set of commodity prices drift apart over a span of time, offering a more comprehensive assessment. Firstly, we employ Johansen’s cointegration test on rolling subsamples to determine the number of statistically significant cointegrating vectors among the prices of 12 major commodity groups. Under this approach, an increase in the number of significant cointegrating vectors indicates a reduction in relative price variability, while a decrease suggests the opposite. Subsequently, we employ ordinary least squares regression to analyze how the fluctuations in inflation affect the variability in relative prices. The sample period ranges from December 2007 to April 2021.FindingsThe empirical results indicate that there exists a certain threshold inflation rate corresponding to which the variability in relative prices is minimized. More importantly, consistent with the theoretical predictions, the results suggest that it is not inflation per se, but the deviation of inflation from the 3% threshold level in either direction that causes higher dispersion in relative prices.Research limitations/implicationsThe empirical findings from this study have crucial implications for the operation of monetary and fiscal policy. In particular, these findings suggest that stabilizing long-term inflation around a certain threshold rate will not only help to anchor inflation expectations effectively but will also minimize the welfare costs associated with inflation.Originality/valueGiven the rising inflationary pressure in the recent past and its welfare costs, the study assumes crucial importance in understating how fluctuations in inflation distort the relative price structure and eventually cause resource misallocations and economic inefficiency.

Assessing the predictability of the Bank of Russia decisions on the key rate and informational advantage in its forecasting

The communication policy of central banks plays a significant role in setting the expectations of economic agents. If key rate decisions are inconsistent with market expectations, managing expectations and anchoring inflation expectations may be difficult. We assess the predictability of the Bank of Russia’s key rate decisions over the 2021—2023 period in two ways: using media surveys of analysts and shifts in the Russian government bond index and the daily volatility of its yield. The results show a significant impact of unexpected key rate decisions on Russian government bond prices and daily volatility. Then, using statistical metrics computed from macroeconomic survey data and another linear and piecewise linear model, we find the informational advantage of the Bank of Russia in predicting the key rate. The decisions unexpected for the market are explained by the information advantage of the Bank of Russia, as well as the realization of geopolitical and inflation risks in the period under study. Thus, we conclude that there is a need to improve the quality of communication regarding future decisions. As the communication policy develops, the predictability of the Bank of Russia’s decisions on the key rate will increase. In turn, economic agents and market participants will adapt to the expected decisions in advance, which will accelerate the achievement of the inflation target and the adjustment of inflation expectations.

Can Fiscal Consolidation Announcements Help Anchor Inflation Expectations?

Can Fiscal Consolidation Announcements Help Anchor Inflation Expectations?

Abrupt monetary policy change and unanchoring of inflation expectations

Inflation expectations can quickly become unanchored if the central bank undermines its commitment to the inflation target. This paper exploits an abrupt change in monetary policy by the Brazilian Central Bank in 2011 and microdata from a daily survey of professional forecasters to establish support for this claim. Reanchoring came only years later, after a regime shift that included a change of government. A simple model with a well-defined concept of (un)anchored inflation expectations provides a coherent explanation and structural interpretation of our empirical findings.

Does Inflation Targeting Anchor Inflation Expectations in India? Evidences from Surveys of Household and Professional Forecasters

Does Inflation Targeting Anchor Inflation Expectations in India? Evidences from Surveys of Household and Professional Forecasters

Eurozone inflation: fresh projections from global factors

This study identifies the contributions of global factors in determining eurozone inflation. The analysis makes use of an augmented Phillips curve model of inflation, as well as panel data estimates. The findings document the importance of such factors in forecasting inflation, thus, confirming the substantial role of external factors in eurozone inflation. The findings survived certain model specifications. Therefore, monetary, and fiscal policymakers should explicitly consider both domestic and global conditions to anchor inflation expectations in forming specific strategies for taming inflation expectations.

New evidence from the monetary policy communication and inflation expectations nexus in Africa

Motivated by the dearth of evidence, we examine the impact of monetary policy communication on inflation expectations in Africa. Employing text-mining techniques to analyse the monetary policy statements of six African central banks, we compute a novel index of monetary policy communication (MPCI) using the extracted word counts, readability, sentiment and tone indicators. We provide new evidence of a positive and statistically significant impact of sentiments, tone and the MPCI on inflation expectations in Africa. Our results also reveal a rising influence of sentiments in anchoring expectations during the COVID-19 pandemic era. Our results are robust to alternative measures of inflation expectation and to global economic uncertainty. We recommend concise and lucid policy statements alongside statements with tone and policy decision consistency for anchoring inflation expectations. Furthermore, investors should carefully analyse and respond to signals from central bank communication, incorporating these insights into their investment strategies and risk management practices.

Anchoring Inflation Expectations in Selected Asian Countries: The Role of Monetary Policy Credibility

Inflation targeting has become a widespread monetary policy framework in many developing countries, and this approach to achieving its goals depends on the level of trust in the central bank. As the central bank's credibility grows, it gains a greater ability to shape the public's expectations regarding inflation. The public adjusts their expectations about future inflation based on the central bank's declared targets. Still, this adjustment depends on their belief in the central bank's capacity to achieve those objectives. Credibility plays a crucial role in disconnecting these expectations from past trends, enabling them to be formed in a forward-looking manner. This study aims to examine the credibility of monetary policy and inflation in the case of selected South Asian countries like Pakistan, India, Sri Lanka, and Bangladesh. The quarterly data are used from 1990Q1 to 2021Q4, but it little bit varies from country to country. The Credibility Index (CI) is used to measure the credibility of monetary policy. The Quantile Regression (QR) is employed to test the impact of monetary policy credibility on inflation. The results indicate that all the variables are stationary at the same level and have dynamic correlations across quartiles and countries. The results from the regression analysis show that the credibility of monetary policy has a negative impact on the inflation rate. This research enhances the understanding of the vital link between credibility and monetary policy effectiveness in developing economies.

Did the Federal Reserve Break the Phillips Curve? Theory & Evidence of Anchoring Inflation Expectations

Abstract In a macroeconomic model with drifting long-run inflation expectations, the anchoring of inflation expectations manifests in two testable predictions. First, expectations about inflation far in the future should no longer respond to news about current inflation. Second, better anchored inflation expectations weaken the relationship between unemployment and inflation, flattening the reduced-form Phillips curve. We evaluate both predictions and find that the Federal Reserve's communication of a numerical inflation objective, first through its Summary of Economic Projections and later through the announcement of a 2 percent target in 2012, better anchored inflation expectations. Moreover, inflation expectations in the United States have remained anchored amid the volatility of the COVID-19 pandemic. In contrast, similar analysis reveals no evidence of anchoring in Japan despite the adoption of a numerical inflation target.

Asymmetries, uncertainty and inflation: evidence from developed and emerging economies

This paper examines the asymmetric impact of economic policy uncertainty (EPU) and oil price uncertainty (OPU) on inflation by using a Nonlinear ARDL (NARDL) model, which is compared to a benchmark linear ARDL one. Using monthly data from the 1990s until August 2022 for a number of developed and emerging countries, we find that the estimated effects of both EPU and OPU shocks are larger when allowing for asymmetries in the context of the NARDL framework. Further, EPU shocks, especially negative ones, have a stronger impact on inflation than OPU ones and capture some of the monetary policy uncertainty, thereby reducing the direct effect of interest rate changes on inflation. Since EPU shocks reflect, at least to some extent, monetary policy uncertainty, greater transparency and more timely communications from monetary authorities to the public would be helpful to anchor inflation expectations.

The hard road to a soft landing: Evidence from a (modestly) nonlinear structural model

What drove inflation so high in 2022? Can it drop rapidly without a recession? The Phillips curve is central to the answers; its proper (nonlinear) specification reveals that the relationship is strong and frequency-dependent, and inflation is very persistent. We embed this empirically-successful Phillips curve – incorporating a supply-shocks variable – into a structural model. Identification is achieved using an underutilized data-dependent method. Despite imposing anchored inflation expectations and a rapid relaxation of supply-chain problems, we find that absent a recession, inflation will be >3% by the end of 2025. A simple welfare analysis supports a mild recession as preferred to an extended period of elevated inflation, under a typical loss function.

Nonlinearities in the exchange rate pass-through: The role of inflation expectations

This paper investigates nonlinearities in the exchange rate pass-through (ERPT) to consumer and import prices by estimating a smooth transition regression model with different inflation expectations regimes for five inflation targeting countries (the UK, Canada, Australia, New Zealand and Sweden) and three non-targeters (the US, the Euro-Area and Switzerland) respectively over the period January 1993–August 2021. Both market and survey measures of inflation expectations are used as the transition variable, and the nonlinear model is also assessed against a benchmark linear model. The pass-through to both consumer and import prices is found to be stronger in the nonlinear model and in some cases is close to being complete. Also, it is stronger in regime 2, i.e. when markets and consumers expect high inflation rates in the future; this suggests that anchoring inflation expectations helps to reduce the ERPT. Finally, inflation expectations appear to affect the ERPT more in inflation targeting countries.

An Evaluation of the Optimal Inflation Target for Economic Growth in Nigeria

This study uses the threshold regression method to determine the optimal inflation threshold for economic growth in Nigeria. There is evidence that establish that setting an inflation target as a nominal anchor that constrains price movements to a particular point or within a pre-agreed range is indispensable for economic growth. Application of the Bai-Perron structural breakpoints test to the data detected two breaks dated 1999 and 2011. The Lee-Strazicich Unit Root Test showed that the data were cointegrated. The threshold estimation for optimal inflation values in the 5% to 25% band revealed that the residual sums of squares, RSS, is minimized and the R2 is maximized at an optimal inflation threshold of 18% with a statistically significant regression model, suggesting that the optimal inflation target for economic growth in Nigeria is 18%. The Autoregressive Distributed Lag model (ARDL) estimate shows that a 1% increase in inflation leads to an increase of 0.017% GDP growth in Nigeria in the long-run. The estimation of the ARDL model indicate that the coefficients of exchange rate, trade openness and population growth present mixed signaling in relation to GDP growth in the long- and short-run. Our results indicate that the implementation of the inflation targeting framework in a credible, transparent and accountable way could help to anchor inflation expectations, rein in inflation and improve economic growth in Nigeria.

Uncertainties and disagreements in expectations of professional forecasters: Evidence from an inflation targeting developing country

AbstractThis paper investigates whether news‐based measures of economic uncertainty affect professional forecasters' disagreement about economic variables and economic policy instruments in Brazil. With the use of an “Economic Policy Uncertainty” index and a “Media Uncertainty” index to construct an index of economic uncertainty unrelated to policy, we study the effects of economic policy uncertainty and policy‐unrelated economic uncertainty on professional forecasters' disagreement. With the use of data from January 2002 to January 2021, we find that disagreements in expectations increase with both higher economic policy uncertainty and higher policy‐unrelated economic uncertainty. An exception is disagreement about future inflation, corroborating the importance inflation targeting for anchoring inflation expectations. We further show that economic policy uncertainty affects disagreement about Brazilian fiscal policy, whereas it does not affect disagreement about Brazilian monetary policy.

Flexible Inflation Targeting: Concepts and application in India


 The paper analyses issues important in adapting flexible inflation targeting (FIT) to emerging markets. This sets the context in which the evolution of FIT in India and its performance record are analysed. The dominance of supply shocks implies flexibility and fiscal-monetary coordination are necessary. Coordination can reduce the output sacrifice of disinflation, even as it aids fiscal consolidation. Communication has a major role in guiding expectations towards the inflation target. Strict implementation of inflation targeting imposed a large output sacrifice in the early years, but reversal to flexible implementation, in line with the original agreement, succeeded in keeping inflation largely within announced tolerance bands with a good growth recovery. Forecasting has improved and errors in both directions indicate the absence of bias. While there were supportive events in the initial years, such as the 2014 crash in oil prices and softening of food price inflation, the regime has also survived adverse periods of pandemic related supply-chain snarls and rising oil prices. A long period of disinflation and output sacrifice need not be necessary to anchor inflation expectations when there is complementary supply-side action. Since policy has to respond if inflation persistently exceeds the tolerance band, this also contributes to anchoring inflation expectations.

Out of Bounds: Do SPF Respondents Have Anchored Inflation Expectations?

AbstractSince the Federal Open Market Committee announced a 2% inflation target in 2012, the median long‐run inflation forecast of professional forecasters has been near target. We show, however, that most individual forecasters' long‐run inflation expectations fluctuate substantially, with sizeable departures from target. We propose a new “bounds anchoring” indicator based on deviations of individuals' long‐run forecasts from target. This indicator sheds new light on gradual changes in expectations since the 2012 announcement. We find that bounds anchoring gradually strengthened in the years following the target announcement, but that this trend has recently started to reverse.

Flexible Inflation Targeting: Performance evaluation overlooks vital issues


 The paper analyses some vital aspects of India’s flexible inflation targeting (FIT) regime, whose first-term performance was evaluated by the RBI in 2021. The absence of negative shocks, collapse of international commodity prices at the time of its introduction, and decelerating growth are pointed out in this article as notable contributors to achieving inflation target than the change of regime as claimed by the RBI. The success in anchoring inflation expectations is contestable in the light of their rigid persistence, association with fuel prices and upward drift with resurgence of inflation in recent times, indicating that the task remains unaccomplished. The post-FIT rise in output volatility is highlighted, raising the question if increased inflation focus contributed to slower growth. Macroeconomic stability ascribed to credibility gained under FIT is similarly shown without basis as indicated by oil-price spikes and exchange rate pressures. Overall, FIT’s performance awaits further testing, especially over different economic cycles.

RESEARCH ON GLOBAL GDP AND CPI UNDER POST EPIDEMIC (COVID-19) BASED ON DECOUPLING INDEX MODEL

BackgroundIn 2021, COVID-19 came back, but the global economy is still recovering, which will lead to long-term economic failure. This is because the differentiation of short-term economic trends will have a lasting impact on medium-term economic performance. In the past 2021, the world's major economies have rebounded to varying degrees. The spread of the novel coronavirus epidemic, the continuous rise in energy prices, the outbreak of the supply chain crisis and higher than expected inflation have also slowed down the pace of global economic recovery.Research Objects and MethodsThe delta virus is spreading rapidly, and the newly mutated omiclone virus is also spreading rapidly, which brings more uncertainty to the duration of the epidemic. All parties should take strong policy measures at the multilateral level to promote vaccination, address climate change, provide international liquidity and enhance the prospects of the global economy. In 2021, the five major GDP countries of the United States, China, Japan, Germany and the United Kingdom were repeatedly hit hard by the COVID-19 in 2019, and the global economic recovery was struggling. This paper studies the decoupling model between GDP and CPI of the top five countries in the global economy in 2021, and studies citizen anxiety under the construction of this model.ResultsOverall inflation in most economies is expected to peak in the last months of 2021 and return to pre epidemic levels by mid-2022. However, considering that the current recovery process is full of uncertainty, there is still great uncertainty about the inflation outlook, and for various reasons, inflation may exceed expectations. Clear policy communication and appropriate monetary and fiscal policies will help prevent inflation panic from leading to changes in inflation expectations. At the same time, the results showed that after controlling the demographic variables, the four variables could explain 10% of the variation of anxiety level (ar2-0.10, P < 0.01). The explanatory effect of self-efficacy on anxiety level was statistically significant. The regression coefficient was -0.336 (P < 0.01). The level of dignity has a significant inhibitory effect on the level of anxiety at the level of 0.01. Four variables can explain 22% of the change of depression level, f △ rr-0.22. P<0.01). The regression coefficient was 0.347 (P < 0.1). The level of optimism has a significant inhibitory and influence on the level of self depression, at the level of 0.01.ConclusionWhat is the prospect of economic recovery in the post epidemic era? In 2022, the most important factor in the global economic recovery is the evolution of coronavirus disease in 2019. Strong policy actions can usually curb inflation and inflation expectations, and the good and credible communication of the central bank also plays a very important role in anchoring inflation expectations. National authorities must be alert to triggers that could trigger a perfect storm of price risk. Therefore, inflation is a double-edged sword. We can't simply think of it as good or bad. On the contrary, we should adopt corresponding policies according to its position in the global value chain, the supply chain, hedge the impact of rising commodity prices, and price and control related products and key links, which will come from the further improvement of the global industrial chain and supply chain. Through the research, we found that citizens with higher levels of psychological capital have lower levels of anxiety and depression. Therefore, we can think that citizens with high internal psychological capital can alleviate the psychological pressure, anxiety and depression brought by psychological capital to a great extent through their own psychological quality. At the same time, we also found that relatively speaking, citizens with high individual psychological capital are less affected by family factors, work and life, traffic safety, their own health and future fear. Farmers with high level of psychological capital can better deal with the influence of family factors. They are full of hope for the future, optimistic about life and less worried about the impact of life.

The Role of the Media in the Inflation Expectation Formation Process

This research highlights the role played by the media in the formation of inflation expectations among various respondents in Ukraine. Using a large news corpus and machine-learning techniques, I have constructed newsbased metrics that produce quantitative indicators for texts, which show if the news topics are relevant to inflation expectations. I have found evidence that various news topics may have an impact on inflation expectations, and can explain part of their variance. Thus, my results could help in the analysis of inflation expectations – which is of value, given that anchoring inflation expectations remains a key challenge for central banks.

Conditional exchange rate pass-through and monetary policy credibility: Insights from Uruguay and Chile

The exchange rate pass-through (ERPT) to local prices is critical for determining inflation dynamics and monetary policy. Different factors have been considered to explain the variation of the ERPT across time and countries. This paper aims to disentangle the role of shocks and monetary policy credibility on the ERPT, estimating medium-scale New Keynesian models for Uruguay and Chile that explicitly incorporate the possibility of imperfect credibility. The estimations show a significant degree of imperfect credibility in Uruguay and an important role for exchange rate stabilization in the monetary policy rule. Both aspects are interlinked and should be tackled together by the monetary authority in Uruguay. The estimated ERPT tends to be lower when the shock has an offsetting effect in aggregate demand and when monetary policy is more credible. Estimations for Chile stress that this country has well anchored inflation expectations and a very small degree of exchange rate stabilization.