Degree Of Inflation Persistence Research Articles

Revisiting the Phillips curve for Indonesia: What can we learn from regional data?

This study seeks new empirical evidence of the Phillips curve in Indonesia, an emerging and geographically diversified economy. There are three important contributions from this research. First, applying panel econometric method to exploit regional variation, the study resolves the issue of using on-target national inflation rates that potentially causes weakening inflation-output link. Second, the research examines the relevance of mining industry for output gap measurement at regional level. Third, it highlights the differences in the Phillips curve between the west and east regions owing to their different underlying economic structures. Our estimation using regional data support the validity of the Phillips curve relationship in Indonesia. Backward-looking inflation expectations, exchange rate dynamics and international prices also significantly affect inflation. In addition, the effect of output gap on inflation is larger if the mining sector is excluded from output gap measurement. Finally, we find apparent differences between the west and the eastern regions in the slope of Phillips curve, as well as in the degree of inflation persistence and exchange rate pass-through. The results are robust to alternative specification. Our study adds significantly to the empirical literature on the Phillips curve and have meaningful policy implications.

Does a Monetary Union Matter for the Degree of Inflation Persistence? The Case of the West Africa Monetary Zone (WAMZ)

The literature on the dynamics of inflation appears to have shifted from the question of the root cause of shocks to inflation, to whether the monetary union has a bearing in the measure of the degree or the persistence of the effect of the shocks. To capture the specific effect of monetary policy shocks on the persistence of inflation in WAMZ, a multivariate Vector Autoregressive Moving Average GARCH (VARMA- GARCH) framework is implemented. The study employs both conventional and conditional time-varying unit root tests to understand the extent to which monetary union influences the degree of inflation persistence. We find the degree of inflation persistence to have been relatively lower since the advent of monetary union in the WAMZ. The significance of this finding is particularly evident when the time-varying property of the persistence is captured. It is also observed that a monetary policy shock has the potential to neutralise the persistence of shocks to inflation at least in the long run, particularly when the timevarying property of the inflation series is captured.

Monetary and fiscal policy in a liquidity trap with inflation persistence

This paper relies on the new Keynesian model with structural inflation persistence to characterize the optimal monetary and fiscal policy in a liquidity trap. It shows that, with a Phillips curve that is both forward and backward looking, the monetary policy that is implemented during a liquidity trap episode can be sufficient to avoid a depression. The central bank does not need to commit beyond the end of the crisis to get some traction on economic activity. Regarding fiscal policy, inflation persistence justifies some front-loading of government expenditures to get inflation started, such as to reduce the real interest rate. The magnitude of the optimal fiscal stimulus is decreasing in the degree of inflation persistence. Finally, if inflation persistence is due to adaptive expectations, rather than to price indexation, then monetary policy is ineffective while the optimal fiscal stimulus is large and heavily front-loaded.

Persistensi Inflasi Regional di Sulawesi Selatan

The objective of this study is to analyse the persistence of inflation level and the contribution of a number of commodities (goods and services) againts the forming of persistence inflation level in South Sulawesi. In addition, this study seeks to reveal the role of Regional of Inflation Oversight Team (TPID) in controlling inflation level. Using the firsth quarter data of Central Bank from 2006 to 2016, this study developed estimation by using applying Univariate Autoregressive (AR) Model. The study proved that the level of inflation persistence in South Sulawesi was high. This result indicates that the inflation level needs time to return from the inflation “shock” level to its natural level. The high level of inflation persistence was reflected by the length of time needed to absorb 50% of shocks occurred, before returning to its natural level in 13 months. Using the Partial Adjustment Model (PAM), it showed that the inflation persistence in South Sulawesi was mainly caused by the “shock’ occurred on a group of housing, water, electricity, gas and fuel as administered price group and on a group of food as volatile food group. In addition, the existence of TPID, as an effort to coordinate monetary and regional fiscal policy, has been proved to have a negative correlation against regional inflation in South Sulawesi. Abstrak Penelitian ini bertujuan untuk menganalisis tingkat persistensi inflasi di Sulawesi Selatan dan kontribusi sejumlah komoditas atau kelompok barang/jasa terhadap pembentukan persistensi inflasi di Sulawesi Selatan. Selain itu, penelitian ini juga melihat peranan Tim Pemantau dan Pengendali Inflasi Daerah (TPID) dalam menjalankan fungsi pengendalian inflasi. Dengan menggunakan data time series triwulan I tahun 2006 s.d. 2016 yang bersumber dari publikasi Bank Indonesia, penelitian ini melakukan estimasi dengan pendekatan Univariate Autoregressive (AR) Model. Hasil Penelitian membuktikan bahwa Inflasi di Sulawesi Selatan memiliki derajat persistensi yang tinggi. Persistensi inflasi yang tinggi mengindikasikan bahwa inflasi membutuhkan waktu yang cukup lama untuk kembali ke nilai alamiahnya setelah adanya shock. Tingginya derajat persistensi inflasi Sulawesi Selatan tercermin dari lamanya jangka waktu yang dibutuhkan oleh inflasi untuk menyerap 50% shock yang terjadi sebelum kembali ke nilai alamiahnya yaitu selama 13 bulan. Dengan model Partial Adjustment Model (PAM) diketahui bahwa persistensi inflasi Sulawesi Selatan dipengaruhi oleh shock yang terjadi pada kelompok perumahan, air, listrik, gas dan bahan bakar sebagai kelompok administered price dan kelompok bahan makanan sebagai kelompok volatile foods. Selain itu, keberadaan TPID sebagai upaya untuk mengoordinasikan kebijakan moneter dan fiskal regional dalam rangka mengontrol laju inflasi, terbukti memiliki arah hubungan negatif terhadap inflasi regional di Sulawesi Selatan.

The investigation of inflation persistence in Croatia in the period of 2005–2013

The aim of this article is to analyse the inflation persistence phenomenon in the theory of economics and in Croatian economy. In the economic literature there are only few studies on the phenomenon of inflation persistence in Croatia. That is why we try to fill the gap in this area by analysing the phenomenon of inflation persistence in the Croatian economy, with particular emphasis of this phenomenon for different groups of goods and services. In this article we use a research method based on literature studies in the field of macroeconomics and international finance and econometric methods (Bayesian Vector Autoregression Model [BVAR]). All statistical data used in this article were monthly data and covered the period from January 2005 to December 2013 (108 months) and their source was United Nations Economic Commission for Europe (UNECE) Statistical Division Database. It provides detailed statistical information on countries in Europe, North America and Central Asia. The calculated inflation persistence coefficient in Croatia stood at 0.88 in the period 2005–2013, which apparently confirmed the occurrence of high inflation persistence in this economy. High inflation persistence means a slow return of inflation to its long-run value after a shock. A high degree of inflation persistence should be a signal for the economic authorities of a country to initiate indispensable institutional and labour market reforms which usually increase flexibility of domestic economy and lead to a reduced degree of inflation persistence.

Non-linearities in euro area inflation persistence

This paper investigates the nature of inflation dynamics with a special focus on inflation persistence. Using data from euro area member-states we estimate dynamic non-linear panel models addressing in detail econometric issues concerning unobserved heterogeneity, genuine state dependence, and the initial conditions problem. After controlling for observed and unobserved heterogeneity, our results suggest that the degree of inflation persistence is genuine and varies depending on whether the inflation rate is too high, within the range of ECB's target of price stability, too low or negative. This implies that policies to stabilize inflation in the short run will have longer-run effects.

The dynamics of inflation: a study of a large number of countries

Over the last twenty years the statistical properties of inflation persistence has been the subject of intense investigation and debate without reaching a unanimous conclusion yet. In this article we attempt to shed further light to this debate using a battery of econometric techniques in order to provide robust evidence on the degree of inflation persistence and whether this has changed during the period in which several countries have followed inflation-targeting regimes or new monetary regimes. We consider the inflation rates of thirty developed and emerging economies using quarterly data for the period 1958 to 2007 which include alternative monetary policy regimes. The coefficient of the inflation parameter is estimated by Ordinary Least Squares (OLS), Autoregressive Moving Average (ARMA) and Autoregressive Fractionally Integrated Moving Average (ARFIMA) models. Furthermore, the grid-bootstrap Median Unbiased (MUB) estimator approach developed by Hansen (1999) is used to estimate the finite sample OLS estimates coupled with the 95% symmetric confidence interval. We also examine parameter stability of persistence coefficients by estimating a model with time-varying parameters.

Timeless perspective versus discretionary policymaking when the degree of inflation persistence is unknown

One major strand in optimal monetary policy analysis considers the robustness of alternative policies under model uncertainty. Another has focused on the appropriate perspective for optimal monetary policy, namely discretion or the timeless perspective (TP). The paper bridges these two parallel lines of research by assessing the welfare consequences of both policy perspectives in the presence of misperceptions about the degree of intrinsic inflation persistence. Contrary to most standard results, discretion can be the more robust perspective, the reason being that the TP exploits the expectations channel. With misperceptions this leads to large deteriorations in welfare.

Inflation Persistence, Backward-Looking Firms, and Monetary Policy in an Input-Output Economy

This paper studies the implications of inflation persistence (generated by backward-looking price setters) for monetary policy in a New Keynesian 'input-output' model--a model with sticky prices both in intermediate and final goods sectors. Optimal policy under commitment depends on the degree of inflation persistence in both sectors. Under discretion, speed-limit targeting--targeting the change in the output gap--outperforms price-level and inflation targeting in the presence of inflation persistence. If inflation persistence is low in the intermediate goods sector, price-level targeting outperforms inflation targeting despite high inflation persistence in the final goods sector.

Inflation Persistence, Backward-Looking Firms, and Monetary Policy in an Input-Output Economy

This paper studies the implications of inflation persistence (generated by backward-looking price setters) for monetary policy in a New Keynesian input-output model--a model with sticky prices in both intermediate and final goods sectors. Optimal policy under commitment depends on the degree of inflation persistence in both sectors. Under discretion, speed-limit targeting--targeting the change in the output gap--outperforms price-level and inflation targeting in the presence of inflation persistence. If inflation persistence is low in the intermediate goods sector, price-level targeting outperforms inflation targeting despite high inflation persistence in the final goods sector.

Monetary Policy and Inflation Performance: Evidence from Exchange Rate Regimes in Sri Lanka

This paper examines empirical evidence on monetary policy and inflation performance across exchange rate regimes in Sri Lanka. The criterion used to examine inflation performance is the degree of inflation persistence. Three alternative definitions of inflation persistence are used to model inflation dynamics. First, autocorrelation properties of inflation process are examined. Estimates of traditional Phillips curve and the hybrid-new Keynesian Phillips curve (H-NKPC) suggest a significant upward shift in inflation persistence following the change in exchange rate system in late 1977. Recursive estimates of coefficient on lagged inflation and Chow parameter stability tests confirm these results. Second, inflation response to systematic monetary policy actions is examined. Results suggest that inflation is more persistent and monetary policy is more accommodative in the flexible exchange rate regime. However, the correlation between money growth and inflation is found to be modest. Finally, inflation response to non-systemic policy actions (i.e., policy shocks) is examined through impulse response functions of an unrestricted VAR system. Results suggest that policy shocks are more persistent in the flexible exchange rate regime, than in the fixed exchange rate regime. However, maximum lag length of inflation response to a policy shock is not significantly different across regimes, suggesting that results from the impulse response analysis are inconclusive. Overall, there is substantial evidence to suggest that the shift in inflation persistence coincides with the change in exchange rate regimes. Moreover, during the flexible regime, higher monetary accommodation has resulted in higher inflation persistence. Because of sluggish response of inflation to changes in monetary policy measures, more stringent monetary policy measures may be needed to curb inflationary pressures.(JEL E 31, E 52) Key Words: Inflation Persistence, Monetary Policy, Exchange Rate Regimes DOI: 10.4038/ss.v37i1.1227 Staff Studies Volume 37 Numbers 1& 2 2007 p.69-117

Mean reversion and sales

This article analyses the degree of inflation persistence in the EU15 using disaggregate HICP price indices. The results, based on a nonparametric measure proposed by Marques (2004) suggest a very moderate degree of median and mean inflation persistence. The modified treatment of sales in the Harmonised Index of Consumer Prices tends to reduce the measured degree of inflation persistence.

Sectoral and Aggregate Inflation Dynamics in the Euro Area

This paper synthesises the implications of recent statistical evidence regarding inflation persistence in the euro area. For aggregate data, the degree of inflation persistence appears to be very high for sample periods spanning multiple decades but falls dramatically once we allow for time variation in the mean level of inflation; furthermore, the timing of these breaks in mean generally coincides with observed shifts in the monetary policy regime. Finally, sectoral inflation series exhibit much less persistence than aggregate inflation, mainly because of the influence of transitory sector-specific shocks. (JEL: E31, C22, C43)

Optimal monetary policy and the role of hybrid inflation-price-level targets

This study investigates the role of hybrid inflation-price-level targets as a solution to the well-known stabilization bias problem that arises under discretionary policies. The analysis shows that social welfare will be improved by employing a weighted average of inflation and price level as one of the central bank's target variables in addition to the output gap growth target. The reason is that imposing the optimal hybrid target will reduce inflation variability in a highly efficient way. In particular, the optimal hybrid regime outperforms other previously suggested regimes when the degree of inflation persistence is moderate.

Would “Cold Turkey” Work in Turkey?

Persistently high inflation rates have led many to believe that inflation in Turkey has become “inertial,” posing an obstacle to disinflation. We assess the empirical validity of this argument. We find that the current degree of inflation persistence in Turkey is lower than that of Brazil and Uruguay prior to their successful stabilization programs. More significantly, expectations of future inflation are more important than past inflation in shaping the inflation process, providing little evidence of “backward-looking” behavior. Using survey data, we find that inflation expectations, in turn, depend largely on the evolution of fiscal variables. JEL Classification Numbers: E31, E52

Inflation targeting in Brazil: constructing credibility under exchange rate volatility

This paper assesses the challenges faced by the inflation-targeting regime in Brazil. The inflation-targeting framework has played a critical role in macroeconomic stabilization. We stress two important challenges: construction of credibility and exchange rate volatility. The estimations indicate the following results: (i) the inflation targets have worked as an important coordinator of expectations; (ii) the Central Bank has reacted strongly to inflation expectations; (iii) there has been a reduction in the degree of inflation persistence; and (iv) the exchange rate pass-through for “administered or monitored” prices is two times higher than for “market” prices.

Monetary Policy and Inflation in Brazil (1975-2000): A VAR Estimation

This paper investigates monetary policy and basic macroeconomic relationships involving output, inflation rate, interest rate, and money in Brazil. Based on a vector autoregressive (VAR) estimation, it compares three different periods: moderately-increasing inflation (1975-1985), high inflation (1985-1994), and low inflation (1994-2000). The main results are the following: (1) monetary policy shocks have significant effects on output; (2) monetary policy shocks do not induce a reduction in the inflation rate in the first two periods, but there are indications that they have gained power to affect prices after the Real Plan was launched; (3) monetary policy does not usually respond rapidly or actively to inflation-rate and output innovations; (4) in the recent period, the interest rate responds intensely to financial crises; (5) positive interest-rate shocks are accompanied by a decline in money in all the three periods; (6) the degree of inflation persistence is substantially lower in the recent period.

Monetary policy and inflation in Brazil (1975-2000): a VAR estimation

This paper investigates monetary policy and basic macroeconomic relationships involving output, inflation rate, interest rate, and money in Brazil. Based on a vector autoregressive (VAR) estimation, it compares three different periods: moderately-increasing inflation (1975-1985), high inflation (1985-1994), and low inflation (1994-2000). The main results are the following: monetary policy shocks have significant effects on output; monetary policy shocks do not induce a reduction in the inflation rate in the first two periods, but there are indications that they have gained power to affect prices after the Real Plan was launched; monetary policy does not usually respond rapidly or actively to inflation-rate and output innovations; in the recent period, the interest rate responds intensely to financial crises; positive interest-rate shocks are accompanied by a decline in money in all the three periods; the degree of inflation persistence is substantially lower in the recent period.

Monetary Policy and Uncertainty about the Natural Unemployment Rate

Inflation-targeting central banks have only imperfect knowledge about the effect of policy decisions on inflation. An important source of uncertainty is the relationship between inflation and unemployment. This paper studies the optimal monetary policy in the presence of uncertainty about the natural unemployment rate, the short-run inflation-unemployment tradeoff and the degree of inflation persistence in a simple macroeconomic model, which incorporates rational learning by the central bank as well as private sector agents. Two conflicting motives drive the optimal policy. In the static version of the model, uncertainty provides a motive for the policymaker to move more cautiously than she would if she knew the true parameters. In the dynamic version, uncertainty also motivates an element of experimentation in policy. I find that the optimal policy that balances the cautionary and activist motives typically exhibits gradualism, that is, it still remains less aggressive than a policy that disregards parameter uncertainty. Exceptions occur when uncertainty is very high and in inflation close to target.