Central Bank Inflation Research Articles

Central bank communication: Inflation target transparency with fiscal policy

AbstractThis article examines the impact of opacity in announcing the central bank's inflation target on macroeconomic volatility and welfare, considering the interaction between an independent central bank and a fiscal authority. Our findings suggest that a key factor influencing the effects of central bank transparency is the relative importance placed by the central bank, compared to the government, on output stabilization versus inflation stabilization. Specifically, when output stabilization is relatively more important for the central bank than for the government, full opacity may benefit the central bank, but not necessarily society as a whole.

Trust and monetary policy

AbstractWe analyze how trust affects the transmission of negative demand and supply shocks using a behavioral macroeconomic model. We define trust to have two dimensions: trust in the central bank's inflation target and trust in the central bank's capacity to stabilize the business cycle. We find, first, that when large negative shocks occur, the subsequent trajectories taken by output gap and inflation typically coalesce around a good and a bad trajectory. Second, these good and bad trajectories are correlated with movements in trust. In the bad trajectories, trust collapses, and in the good trajectories, it is not affected. This feature is stronger when a negative supply shock occurs than in the case of a negative demand shock. Third, initial conditions, in particular the initial state of inflation and output expectations, matter. Unfavorable initial expectations drive the economy into a bad trajectory, and favorable initial expectations produce good trajectories. Fourth, we analyze the sensitivity of our results with respect to the size of the shocks. Fifth, we derive implications of our results for our capacity of making forecasts about the effects of large demand and supply shocks.

A theory-based method to evaluate the impact of central bank inflation forecasts on private inflation expectations

We propose a theory-based method to assess the impact of central banks’ inflation forecasts on private inflation expectations. We use regressions derived from a leader-follower model with noisy information and public signals. The leader is the Central Bank (CB), which solves a signal extraction problem to estimate the rational expectation of inflation. Private agents then act by solving an analogous problem to estimate this same value by using their own information and the forecasts disclosed by the CB. The method allows for estimating the structural parameters that characterize noisy information models, which are hard to estimate using purely econometric tools. It also sheds light on the issue of the alleged CB’s superiority in predicting inflation behavior.

Analysis of the causal relationships between Central Bank reserves, economic activity, and inflation

Analysis of the causal relationships between Central Bank reserves, economic activity, and inflation

The Stabilizing Effects of Publishing Strategic Central Bank Projections

AbstractExpectations are among the main driving forces for economic dynamics. Therefore, managing expectations has become a primary objective for monetary policy seeking to stabilize the business cycle. In this paper, we study whether central banks can manage private-sector expectations by means of publishing one-period ahead inflation projections in a New Keynesian learning-to-forecast experiment. Subjects in the experiment observe these projections along with the historic development of the economy and subsequently submit their own one-period ahead inflation forecasts. In this context, we find that the central bank can significantly manage private-sector expectations and that this management strongly supports monetary policy in stabilizing the economy. Moreover, published central bank inflation projections drastically reduce the probability of a deflationary spiral after strong negative shocks to the economy.

МОДЕЛІ АНАЛІЗУ ІНФЛЯЦІЙНИХ ОЧІКУВАНЬ

Households, firms, and financial market participants adjust their behavior according to their own expectations about future price increases. Inflation expectations often lead to higher actual prices. Accordingly, inflation expectations are characterized by self-fulfilling and they are one of the factors influencing the future level of inflation. It is important for central banks to monitor inflation expectations and shape them in the desired way through their activities and communications through the monetary transmission expectations channel. Therefore, empirical conclusions about the inflation expectations of agents are significant and relevant for monetary policy. This paper presents the results of the analysis of existing types of models for the analysis of inflation expectations with the subsequent implementation of individual models on the data of inflation expectations, which are monitored by the NBU. Particular attention is paid to the analysis of models of inflation anchoring, models of assessment of rationality and shift of inflation expectations, as well as models of forecasting inflation expectations. The use of applied econometric tools allowed to obtain competitive science-based results. In particular, the calculations showed that the highest sensitivity to inflation among all groups of respondents is shown by households, and the least sensitive according to the results of the model are inflation expectations of financial analysts. The developed forecast models have acceptable forecasting properties and can be used to forecast inflation expectations. The analysis showed that the degree of anchoring of inflation expectations at the level of the Central Bank's inflation target determines the effectiveness of monetary transmission through the expectations channel, and reflects the level of confidence of economic agents in monetary policy. In the absence of trust in the Central Bank, inflation expectations can be adaptive, i.e. those that are formed under the influence of past inflation. Under such conditions, the effectiveness of the transmission mechanism of monetary policy weakens, and current inflation, due to deteriorating expectations, becomes more sensitive to the effects of various shocks. On the basis of the analyzed literature the main directions of research of inflation expectations, and also the basic approaches to construction of models of the analysis of inflation expectations are presented.

Глобальная динамика и адаптация национальной экономики

Abstract. The purpose of the article is to develop the concept of effective regulation of the economy, adequate to the current stage of economic development. The article formulates theoretical approaches to the study of the evolution of the economy and the factors that cause the cyclical occurrence of crisis situations in the global and national economies, presents a system of connections and relationships, factors and prerequisites that caused the emergence of the global crisis in 2020. The crisis situation, the catalyst of which was the coronavirus pandemic, is developing under the influence of global prerequisites caused by the interference of three global cyclical waves: the technological cycle (N. Kondratiev, S. Glazyev), the systemic cycle of capital accumulation (D. Arrigi, T. Piketty) and the civilization wave (E. Toffler). The influence of modern global challenges on the economy, trends and prospects of national financial policy is considered. The author concludes that the key problems of the national economy: income differentiation, poverty, capital outflow and uncontrolled Central Bank inflation are interrelated. The consequences of the modern anti-inflationary policy of the Bank of Russia are analyzed and predicted. The trends of post-crisis development of global and national economies are constructed and substantiated, the connection of the development of financial market models in various countries with the stages of the system cycle and the centers of capital accumulation is proved. Methodological, methodological and practical recommendations are proposed for the selection and justification of the activities of the national program aimed at building an effective post-crisis socio-economic mechanism in order to overcome crisis phenomena and subsequently ensure the sustainable development of the national economy and its sectors. Modern conceptual approaches to the development of a national program aimed at building an effective socio-economic mechanism to ensure the sustainable development of the national economy, regions, sectors, industries, enterprises, and improving the welfare of citizens are formulated. Bringing the vector of strategic development of the national economy in line with global development trends will allow achieving the stated goals of economic policy, increasing the competitiveness and efficiency of the national economy, national economic entities. The implementation of an adequate regulatory mechanism and the choice of the exact time range and direction of rational efforts will increase the level of well-being of the population, the stability of the economy and society, and successfully counteract modern global challenges and threats to national security.

Why a new inflation era, not a regime shift, is likely

▪ A shift to a new policy regime with much higher and more volatile inflation is a possibility that can't be ignored due to its impact on the economy and financial markets. But in our view, if the pandemic triggers lasting effects on the inflation‐generation process, a more plausible outcome is a new era of slightly higher inflation within the current central bank inflation targeting regime. ▪ Two distinct eras have characterised the broad inflation targeting policy regime of the past 25 to 30 years. Before the global financial crisis, CPI inflation typically averaged just above 2% in most advanced economies, and central bank policy rates went up as well as down. In the post GFC era, inflation has been lower and less volatile, despite ultra‐accommodative monetary policy. ▪ The shift in eras reflected two broad developments. First, factors such as a savings glut, austerity, and a lack of conventional monetary policy space created a period of deficient demand, dampening inflationary pressures. ▪ Second, other developments weakened the upward push on inflation from stronger activity in the domestic economy. Central banks' previous successes in anchoring inflation reduced expectations of higher inflation during bursts of demand. Globalisation and automation also helped to lessen cost pressures, while labour market development helped to keep wage pressures contained. ▪ Many of these inflation‐taming factors are still firmly in place. But others have either lessened or even reversed, albeit perhaps only temporarily (Figure 1). This suggest a new era could have begun in which central banks may find it easier to meet their inflation targets. We think well‐anchored, but somewhat higher and more volatile, inflation is likely, and in due course will prompt a modest normalisation of policy rates.

Incorporating asset price stability in the European Central Bank's inflation targeting framework

AbstractWe propose a new flexible inflation targeting index, the economic stability index (ESI), that could enable the European Central Bank (ECB) to implement more effective monetary policy for the euro area (EA). This index incorporates separately weighed house prices and stock prices. Furthermore, by weighting the housing sector in both normal and bubble events, it enhances the forecasting ability and accuracy of this new index. We demonstrate the resilience of this index using a range of robustness checks with multiple empirical methods. Our index that is equipped with these forward‐looking variables enhances the ability to sense potential economic risks, whilst improving price stability and minimizing the output gap variance. This broader index may assist the ECB in addressing the challenges of the long‐term decline of neutral interest rates in many EA economies and the weakening of the inflation/unemployment relationship under the Philips curve. The complexity of the ECB relationship with different fiscal authorities prevents any changes without significant structural variance. The ECB, however, can use a stabilization tool with enhanced foreseeability such as this ESI to improve stability without making significant structural changes.

EVENT STUDY OF IPO IN INDONESIA: PUMP-AND-DUMP & FLIPPING STRATEGY ANALYSIS

There were three important IPO anomalies: the positive average initial return (improperly called short-term 'underpricing'), the long-term underperformance, and hot/cold IPO. The EVENT STUDY model explained the 'underpricing' based on the assumption that the underwriter sets the initial price equal to the market-perceived true value and investors were rational. IPO prices are affected by demand and supply. The idea of the model was to explore pump-and-dump and flipping patterns exhibited upon IPO anomalies event in Indonesia. Pump-and-dump is the strategy to manipulate stock prices, while flipping was stocks bought at the IPO and sold at early days ta listing date. This strategy oftentimes exhibits anomalous behavior. Some implications of this model for the IPO market were positive 1st-day initial return (IR) and a negative relation cumulative average abnormal 5-days abnormal return (CAAR-5days) for flipping strategy. The other was a relationship between underperformance cumulative average 30-days abnormal returns (CAAR-30days) and cumulative average 5-days (CAAR-5days) abnormal returns in terms of pump-and-dump strategy. Using the relation between the Characteristics (Size of issue, Board and Floating rate) and Macroeconomics Condition (Central Bank Rate, Inflation rate, USD/IDR exchange, and GDP growth), and the IR, a CAAR-5days and a CAAR-30days, this EVENT STUDY explained the existence of the pump-and-dump and flipping pattern in the Indonesian stock exchanges. The Authors implemented a multivariate analysis of variance (MANOVA) to test hypotheses regarding the effect of a three-variables dependent (the initial return, a 5-days abnormal return, and a 30-days abnormal return) into several dependent variables. Using the IPO data taken from 2015-2019, the paper found that this EVENT STUDY explained the existence of pump-and-dump and flipping patterns at the early trading of IPO stocks in the Indonesia Exchange Market.

Central Bank Digital Currency, Inflation Tax, and Central Bank Independence

Can introducing Central Bank Digital Currency (CBDC) improve social welfare? We construct a dual currency model to study whether introducing CBDC with a record- keeping technology can reduce tax evasion incentives, and further achieve a better al- location than in a cash-only economy. In our model one type of agents can evade the sales tax by using cash whereas the other type of agents cannot. If the sales tax is perfectly substituted by the inflation tax, then there is no way to evade taxes. How- ever, if the sales tax is required for maintaining the central bank independence, there arises an inefficiency associated with tax evasion in a cash-only economy. Introducing CBDC with a positive interest can correct this distortion by discouraging tax evasion, rewarding tax payment, and raising the sales tax collection.

Analysis of the impact of inflation expectations based on machine learning intelligent models

Our country’s economic growth is overly dependent on government investment, and bank credit and money supply lack a strict monitoring mechanism. Therefore, rapid economic growth is always accompanied by inflation risks. In order to study the effect of inflation impact analysis, based on machine learning algorithms, this paper combines artificial intelligence technology to analyze the impact of inflation expectations, and constructs the central bank information disclosure index and inflation expectations index. Moreover, this paper will perform ADF unit root test on the data. In addition, after confirming that the data is stable, this paper uses the Markov Regime Transfer Vector Autoregressive (MSVAR) model and state-dependent impulse response function to test and analyze the effect of China’s central bank communication in guiding the formation of inflation expectations. Through research, we can see that the machine learning algorithm constructed in this paper has significant effects, which can provide a reference for the analysis of the impact of inflation expectations.

Endogenous Forecast Switching Near the Zero Lower Bound

A representative agent contemplates the possibility of an occasionally binding zero lower bound (ZLB) on the nominal interest rate that is driven by switching between two local equilibria, labeled the "targeted" and "deflation" solutions, respectively. This view turns out to be true in simulations, thus validating the agent's beliefs. I solve for the time series of stochastic shocks and endogenous forecast weights that allow the model to exactly replicate the observed time paths of U.S. data since 1988. The data since the start of the ZLB episode in 2008.Q4 are best described as a time-varying mixture of the two local equilibria. Note: The first version of this paper was September 28, 2017, and was published originally as "Endogenous Regime Switching Near the Zero Lower Bound." A subsequent revision was titled "Endogenous Regime Shifts in a New Keynesian Model with a Time-Varying Natural Rate of Interest."

Eurozone or national inflation projections: Which has greater impact on consumer expectations?

We compare the dependence of consumer inflation expectations on European Central Bank (ECB) inflation projections with that on national central bank (NCB) projections in four economies: Austria, Belgium, Finland, and Germany. We aim to assess whether the information published by central banks affects consumers, and whether inflation projections published by NCBs are more relevant to consumers than those published for the entire Eurozone. Inflation expectations were obtained from the Business and Consumer Surveys conducted by the Directorate General for Economic and Financial Affairs of the European Commission and quantified using the probabilistic method. The methodology covers: (1) forecast encompassing tests; (2) the Granger causality test; (3) impulse response analysis complemented by (4) forecast error variance decomposition. The results suggest that the ECB outlook constitutes a more important factor in expectation formation. This article adds to the existing literature by comparing the impact of common and national projections on consumer expectations.

Inflation Expectations and Firms’ Decisions: New Causal Evidence

We use a unique design feature of a survey of Italian firms to study the causal effect of inflation expectations on firms' economic decisions. In the survey, a randomly chosen subset of firms is repeatedly treated with information about recent inflation (or the European Central Bank's inflation target) whereas other firms are not. This information treatment generates exogenous variation in inflation expectations. We find that higher inflation expectations on the part of firms leads them to raise their prices, increase their utilization of credit, and reduce their employment. However, when policy rates are constrained by the effective lower bound, demand effects are stronger, leading firms to raise their prices more and no longer reduce their employment.

INDEPENDENCE OF CENTRAL BANKS, INFLATION AND FRACTIONALIZATION OF SOCIETY IN POST-SOCIALIST COUNTRIES

Post-crisis literature concentrates on the problem of low inflation economic environment for which traditional factors of macroeconomic instability are rather not important. However, is this approach adequate in the case of post-socialist countries for whom the validity of euro-integration divide of institutional path of development takes place? Can the fact of factionalized societies explain the deviations from traditional form of opposite correlation between central banks independence and inflation? Using a sample of 22 post-socialist countries, it is found that there is inverse (traditional) relation between central bank independence and inflation. The degree of such correlation does not decrease much in the case of a lower inflation period. Development of democracy supports the choice toward higher central banks independence. The level of social conflicts affects inflationary instability and in the same time reduces space for consensus about increasing central banks independence. At the same time, the case of higher central bank independence and higher level of inflation compared to average group level (case of Ukraine) corresponds to the strongest fractionalization of society. This helps to conclude that institute of central bank independence is based on informal political rules of behaviour, incentives to maintain which are rooted in the nature of social disharmony.

Central Bank Independence and Inflation Preferences: New Empirical Evidence on the Effects on Inflation

On theoretical grounds, a clear distinction exists between central bank independence and inflation aversion. In the conduct of monetary policy, both contribute to lower inflation. In this paper, we empirically re-examine the nexus between central bank independence and inflation for a large sample of advanced and developing countries over the period 1992-2014 by explicitly accounting for the effect of central bank inflation preferences on inflation developments. Our evidence suggests that both features matter for mitigating inflationary pressures, in line with the relevant theoretical studies. Central bank independence alone seems not to be a sufficient condition to curtail inflation; the expected inverse relationship between central bank independence and inflation appears to hold when we account for the (inflation) conservatism of the central bank. At the same time, higher central bank conservatism seems to result in lower inflationary pressures in the economy. Our results do not support the hypothesis of an interaction (either as substitutes of complements) between the degree of independence and conservatism of the central bank.

Low real interest rates and the zero lower bound

How do low real interest rates constrain monetary policy? Is the zero lower bound optimal if the real interest rate is sufficiently low? What is the role of forward guidance? A model is constructed that incorporates sticky price frictions, collateral constraints, and conventional monetary distortions. The model has neo-Fisherian properties. If the zero lower bound is a problem, then a symptom is inflation above the central bank's inflation target. Extended periods of low nominal interest rates are useful in bringing inflation down and relaxing financial constraints, not for forward guidance reasons. The ZLB may be suboptimal under tight collateral constraints.

Fiscal and Monetary Policy: Coordination or Conflict?

ABSTRACTThis paper examines the interaction between monetary and fiscal policies. Using annual panel data covering the period from 1991 to 2016 for 42 countries, it characterizes the cyclical behavior of monetary and fiscal policy, distinguishing countries by institutional characteristics and policy frameworks. It also applies heterogeneous structural panel VAR methodology to quarterly data from a subset of these countries to assess the response to aggregate demand shocks. The main finding is that central bank independence and inflation targeting are associated with more countercyclical monetary and fiscal policies and an increased degree of coordination between the two.

Secular stagnation: Theory and remedies

To investigate secular stagnation, I add two features to a standard Ramsey model with money: (i) Households have a preference for wealth; (ii) Wages are downward rigid. In this framework, there exists a frictionless neoclassical steady state equilibrium characterized by a low natural real interest rate. In addition, if wages are sufficiently rigid and the natural real interest rate sufficiently low, then there also exists a Keynesian secular stagnation steady state characterized by under-employment, low inflation, and a binding zero lower bound on the nominal interest rate. As wages become more flexible, the Keynesian steady state diverges away from the neoclassical steady state, until wages are so flexible that it ceases to exist. If monetary policy is excessively restrictive, then the secular stagnation steady state is the unique steady state equilibrium of the economy. The optimal policy response to secular stagnation is to move the economy to the neoclassical steady state. This can either be achieved by raising the central bank's inflation ceiling or by taxing wealth and subsidizing investment in physical capital. This optimal tax policy is revenue-neutral.