Domestic Price Level Research Articles

Inflation and Exchange Rates: An International Examination of Relative Purchasing Power Parity

Purchasing power parity (PPP) is an old and controversial proposition in economic literature. It is based on the law of one price, which argues that, after adjusting for the exchange rate, domestic and foreign price levels are equal. The relative version of PPP argues that exchange rate changes depend on the differential between domestic and foreign inflation rates. The absolute PPP version is based on restrictive assumptions that prevent it to hold in the short run. However, several studies support the validity of the relative PPP proposition in the long run. It is often observed that countries with persistently high inflation experience weak currencies. Our empirical testing using impulse response functions derived from a VAR model for eight countries provide mixed results. In six out of eight selected countries, relative PPP is supported by data in the long run.

A Study on the Impact of Quantitative Easing Monetary Policy of the United States on China's Economy

This paper studies the impact of US quantitative easing monetary policy on China's economy. In order to cope with the financial crisis in 2008 and walk out of the economic downturn, the United States adopted quantitative easing monetary policy. However, due to the special status of the US dollar as an international currency, although this unconventional monetary policy has injected sufficient liquidity into the world economy, it also has significant negative spillover effects on other countries. On the basis of relevant theories, this paper empirically analyzes the actual impact of the policy on emerging economies represented by China through VAR model. The results show that the policy has a great impact on China's export trade, domestic prices, capital market and monetary policy, among which the impact on China's domestic price level is the largest. But the overall effects are complex, that there is no consistent direction of change, and the volatility is high. Based on the findings, the China government should put more emphasis on the foreign risks when making monetary policies.

Impact of macroeconomic factors on inflation: An assessment on indian economy by using vector auto-regressive modeling

Inflation is the sustained rise in the prices of commodities. Central Banks have the critical responsibility of ensuring price stability; however, every attempt should be made to ensure that price stability should not hit economic growth. Thus, it becomes imperative for Central Banks to determine the key fiscal and monetary factors that have the greatest impact on domestic price levels. Based on these factors, it can tackle the problem of inflation effectively and efficiently. Further, there are several global price indices and factors that need to be factored in while tackling the problem of inflation. The objective of the current study is to empirically determine the macroeconomic factors that play a significant role in influencing inflation in India. The study considers international food and oil price indices amongst other macroeconomic variables such as the fiscal deficit, index of industrial production, exchange rate, MIBOR, and money supply in order to explain inflation. Monthly data for each of the above variables were collected for the research period 2000-10. The study is based on Vector Auto-Regressive modeling. The Augmented Dickey-Fuller Unit Root Test was performed to test for stationarity of all of the time-series data. The results of the Granger causality tests indicate that fiscal indicators such as fiscal deficit and international factors such as international food and oil price indices play a significant role in influencing inflation. The research outcomes conform to the results of several earlier studies.

Asymmetric and Time-Varying Behavior of Exchange Rate and Interest Rate Differential in Emerging Markets

ABSTRACT This study assesses the nonlinearities in the nexus between exchange rate and interest rate differential in emerging economies of BRICS. We employ Panel Nonlinear Autoregressive Distributed Lag and Panel Threshold Regression (PTR) models. The study finds mixed result for asymmetry in the nexus. It also shows evidence for time-variation and the positive impact of interest rate differential on exchange rate gradually increases at higher economic activity and inflation regime. The implication is that interest rate differential has both asymmetric and time-varying effects on exchange rate which partly explains the continuous adjustment of monetary policy rates in many emerging markets. Finally, the role of economic productivity and domestic price level in the response of exchange rate to interest rate differentials across the BRICS should not be jettisoned to realize plausible outcomes.

Oil and Growth Challenge in Kazakhstan

Kazakhstan possesses substantial amount of petroleum and natural gas and relies extensively on revenues from the export of these commodities. We use Kazakhstan's dependence on revenues from the oil sector to demonstrate commodity producer vulnerability to external commodity price fluctuations. The goal of this paper is to examine the nature of the relationship between real gross domestic product (GDP), fiscal revenues, real exchange rate, price level, and oil prices. We employ Bayesian approach to time series data for the period 2000-2017. We find evidence of significant effect of oil prices on Kazakhstani economy where one of the key channels playing a role in the effect of oil prices on real activity is related to the real effective exchange rate. Additionally, results of this research indicate that one possible channel for oil price shocks to affect the real exchange rate is through the upward pressure on domestic price level.

Oil and growth challenge in Kazakhstan

Kazakhstan possesses substantial amount of petroleum and natural gas and relies extensively on revenues from the export of these commodities. We use Kazakhstan's dependence on revenues from the oil sector to demonstrate commodity producer vulnerability to external commodity price fluctuations. The goal of this paper is to examine the nature of the relationship between real gross domestic product (GDP), fiscal revenues, real exchange rate, price level, and oil prices. We employ Bayesian approach to time series data for the period 2000-2017. We find evidence of significant effect of oil prices on Kazakhstani economy where one of the key channels playing a role in the effect of oil prices on real activity is related to the real effective exchange rate. Additionally, results of this research indicate that one possible channel for oil price shocks to affect the real exchange rate is through the upward pressure on domestic price level.

An Assymetric Evaluation of Oil Price- Inflation Nexus: Evidence from Nigeria

This paper investigates the asymmetric oil price-inflation nexus in Nigeria covering the period of 2009Q1 and 2018Q4. We adopt the Nonlinear Autoregressive Distributed Lags (NARDL) model approach. The result of the study indicates that there exists a nonlinear long run connection between international oil price and inflation in Nigeria which suggests that fluctuations in oil price influence domestic inflation in Nigeria asymmetrically. Further, the result of the study indicates that in the long run, both increase and decrease in global oil price exerts a negative effect on inflation, that is, rise and fall in global oil price will lead to decline in inflation. However, in the short run, increase in global oil price exerts a positive influence on inflation which implies that positive oil price shock is inflationary. The study therefore recommends that government need to source for alternative energy in order to minimize the influence of international oil price shocks on domestic price level.

Relationship between Remittances and Inflation in Nepal

Empirical evidence highlights the significant impact of remittances on a country’s macroeconomic indicators. This holds particular significance for import-dependent developing nations like Nepal, where remittances serve as a crucial source of foreign currency earnings and facilitate the financing of imports. However, there remains a limited understanding of their implications for inflation, as their effects on inflation are contingent upon whether the demand or supply side is more influenced by remittances. This study leverages time series data and employs an error correction model (ECM) to explore the influence of remittances on the domestic price level. The findings indicate that the inflow of remittances has a dampening effect on the domestic inflation rate. This suggests that remittances have played a pivotal role in enabling the import of relatively more affordable goods from abroad, notwithstanding their impact on the overall expenditure of the economy. Furthermore, our research reveals that conventional macroeconomic indicators such as GDP, narrow money supply, and Indian inflation appear to exert pressure on domestic inflation in Nepal. These findings offer valuable insights into the complex relationship between remittances and inflation dynamics in the Nepalese context.

Impact of Oil Price Changes on Selected Macroeconomic Variables in Nigeria

In this study, the impact of oil price changes on selected variables in Nigeria within the period, 1981-2016 had been evaluated. Adopting the ex-post facto research design with annual time series and using The Autoregressive Distributed Lag (ARDL) model; the results revealed that the change in oil price had a positive and significant impact on government revenue and government expenditure, but had no positive and significant impact on the domestic price level. It is therefore recommended that the monocultural economy should be omitted through well-planned and implementation diversification.

China’s Dollar-linked Hong Kong during the Global Crisis

This paper explores the domestic price level and trade competitiveness of Hong Kong in addition to the compatibility of this dollar-based currency board to the criteria inspired by the optimum currency area (OCA) theory. On price and competitiveness, findings point out that during the turmoil Hong Kong had not performed as well as that in the past and an apparent reason for this is the inflows of hot capital from abroad especially of the US that fuelled rising property prices. On conformity to the OCA criteria, the findings broadly corroborate the fixed exchange regime with the US as the monetary anchor country but at the same time China appears as a prospective contender to US as the monetary anchor. In the longer run, amidst the prolonged economic and monetary weaknesses in the US plus the emergence of renminbi as a global currency, Hong Kong might as well unify its exchange rate with the Chinese money.

How important is fiscal stimulus for economic growth? Empirical evidence from G7 countries

This paper contributes to the existing discussion on the quantitative power of fiscal stimulus in the creation of economic growth in two ways. Firstly, by applying structural vector autoregression, our study focuses on assessing the size of the fiscal multipliers in the group of G7 countries. Secondly, using a new dataset for all seven countries in the sample, our study updates the existing empirical record of the extent of fiscal effects on the economic activity. The results indicate empirical relevance of the mechanism of the fiscal multiplier even though estimated values of the fiscal multipliers do not exceed unity in all cases. One-time positive shock in government consumption affects the aggregate output to a greater extent than domestic price level and interest rates. Our findings suggest a non-negligible capacity of the stimulation-designed budgetary policy in the economically strongest countries to boost short-term economic growth.

Inflation Dynamics In A Small Developing Economy: An Empirical Analysis for Ghana

Monetary policy over the data period is aimed at sustaining the growth in the money supply achieved through a tight monetary policy stance, thereby ensuring price and exchange rate stability. This paper aims to empirically examine the share of exchange rate pass-through and local monetary targets in explaining inflation dynamics in Ghana. Annual data is obtained from International Financial Statistics, Organization for Economic Cooperation and Development, and Bank of Ghana’s Annual Reports. The aggregate time series used in the estimation are money (broad money supply, M2, defined as currency plus demand, time and savings deposits held by the public), real income per capita, and the real effective exchange rate. The UK consumer Price index is used as a proxy for the foreign price level since the UK has been Ghana’s largest trading partner over much of the data period. The Treasury bill rate is used as the domestic nominal rate of interest. The Consumer Price Index measures the domestic price level. Using Pesaran, Shin and Smith’s bounds testing approach to cointegration and an error correction model, the paper finds empirical evidence for both short and long run inflationary consequences from changes in monetary factors. The results indicate that changes in money supply, real effective exchange rate, nominal interest rate, real income per capita and foreign prices have a significant influence on the behavior and path of inflation in the long run. However, the short-run dynamics based on an error correction model shows that money supply has no significant impact on the rate of inflation. While real effective exchange rate and nominal interest rate have significant effects, the main driving force behind domestic inflation in the short-run appears to be import prices and real income per capita. The findings highlight the need for an alternative operational target such as the monetary conditions index or an explicit inflation-targeting framework to improve policy credibility.

Inflationary effects of fiscal and monetary policies in Indonesia

This paper analyzes the effects of fiscal and monetary policies on inflation rate in Indonesia. This research uses the error correction model for estimating the empirical model of inflation rate for annual data 1970-2017. The results present the significant effects of fiscal and monetary variables on the inflation rate. These findings reveal the inflationary effects of fiscal and monetary policies in the country. This research also finds the impact of output and exchange rate on inflation rate. Therefore, this paper supports the theory of demand-pull inflation as well as the proposition of imported inflation. The other uniqueness of this research is the inclusion of shock variables in the empirical model. This study asserts the significant role of inflation shock and unanticipated exchange rate on the domestic price level. It implies that domestic inflation is closely related to the international financial sector.

Exchange Rate Pass-Through in Turkey before and after the Adoption of Inflation Targeting Regime

The impact of exchange rate change on the domestic price level which is called as exchange rate pass through has long been of interest in international economics literature. Along with the application of inflation targeting regime widely, the focus of this interest has also evolved to examine the changes in degree and speed of exchange rate pass through under inflation targeting regime. Turkey, adopted Inflation Targeting (IT) as a monetary regime between 2001 and 2006 implicitly and then explicitly, exhibits which was a genuine experience to be analyzed in this respect. From this point of view, the goal of the study is to provide a time-series analysis of exchange rate pass-through for Turkish economy based on single equation Error Correction Model estimation using the monthly data under pre-IT period 1995-2000 and post-IT period 2006-2014. Thus, we try to clarify the effectiveness of inflation targeting regime as monetary policy on the exchange rate pass-through. The findings of the study indicate that the exchange rate pass-through decreased in the post-IT period compared to pre- IT period. Accordingly, it can be argued that the implication of inflation targeting regime reduced exchange rate pass through in Turkey.

The Spillover Effect of Coastal and Inland Shipping Rate Increase on Domestic Price Level with 2014 Input-Output Statistics

연안해운은 국가교통물류시스템에서 중요한 기간운송망의 한 축을 담당하고 있다. 연안해운은 2014년을 기준으로 7억5,600만 인km를 수송하면서 0.4%의 국내 여객운송을 분담하였고 1억1,792만 톤의 화물을 수송하면서 14.5%의 국내 화물운송을 분담하였다. 하지만 오늘날 우리의 연안해운은 영세한 업계, 노후한 선박, 선원과 경영진의 고령화 같은 구조적인 문제들 때문에 심각한 경영압박을 받고 있다. 그럼에도 불구하고 외항해운이 수출의 첨병역할을 하기 때문에 정부의 해운정책은 연안해운보다는 주로 외항해운에 치우쳐 있는 편이다. 본 연구는 산업연관분석 방법론을 사용하여 연안해운업의 중요성을 산업경제학(mesoeconomics)적 시각에서 살펴보 았다. 심각한 경영압박을 받고 있는 연안해운 업계가 정부의 여타 보조정책이 없이 스스로 적자경영으로부터 탈피하기 위하여 불가불 급격한 운임 인상을 단행할 경우를 가정하여, 운임을 인상할 경우 그 충격이 국내 여타 산업들과의 산업 연관 관계를 통하여 교통물류산업의 비용 및 전산업의 물가수준에 미치는 파급효과를 산출하였다. 추계 결과, 연안해운 운임이 5% 증가할 때마다 국내 교통물류산업과 전산업의 산출물가는 0.0042%와 0.0192%씩 증가하는 것으로 나타났다. 한국은행에 따르면 지난 5년간 우리나라의 교통물류산업과 전산업의 산출물가는 각각 연평균 –2.07%와 0.88%씩 증가하였다. 그러므로 연안해운 운임이 5% 인상될 때 국내 교통물류산업의 산출물가가 0.0042% 증가하고 전산업의 산출물가가 0.0192% 증가하는 물가 파급효과는 결코 무시할 수 없는 수준의 물가 충격임을 알 수있다. 이는 연안해운이 국민의 다양한 경제사회적 활동을 지원하는 동시에 여타산업을 지원하는 국가 기간물류망으로써 중간재(서비스) 역할을 충실히 수행하고 있음을 반증한다Recently Korean coastal and inland shipping industry suffers from serious management pressure because of its small scale business on average, old and outdated ships, aging crews and business managers. As a result korean coastal and inland shipping industry as a whole recorded operating deficit at the amount of 29billion won in 2014 year. This study estimated the spillover effects of coastal and inland shipping rate increase on both logistics costs and overall domestic price level, which is caused with an effort to compensate the operating deficit by coastal and inland shipping operators. An inter-industry analysis using 2014 input-output statistics has been conducted under the various level scenarios of coastal and inland shipping rate increases. In the case of 5% increase of Korean coastal and inland shipping rate, the output price level in transportation and logistics sector as a whole was estimated to rise 0.0042% and the overall output price level of Korean industry as a whole to rise 0.0192%. During 2012~16 years, the output price level increased at the rate of –2.07% in transportation and logistics sector and the overall output price level of Korean industry as a whole increased 0.88%. Thus the estimated spillover effects of coastal and inland shipping rate increase of 5% are big enough to take note by Korean government’s policy makers. This result also shows that Korean coastal and inland shipping industry serves well as a intermediary goods for Korean passenger and freight transportation systems.

An input–output model of exchange-rate pass-through

ABSTRACTThe impact of the exchange rate on price formation is often debated through a mechanism called the exchange-rate pass-through. Studies of the pass-through generally rely on econometric analysis implemented on time series data. This study examines pass-through to the domestic price level through an input–output model. The proposed model is implemented on a sample of countries, and a number of different variables connected to the pass-through are examined. A comparison across countries and sectors highlights the importance of the construction sector in price formation. National income is negatively related to the pass-through. A high dependence on intermediate imports implies higher pass-through. Price level volatility and pass-through are positively related; whereas a country’s monetary policy stance has no apparent effect. The effect of exchange-rate volatility is unclear; it is negative for the real effective exchange rate, the connection is very weak in the case of the nominal exchange rate.

Exchange-rate variations and the rate of inflation in emerging economies

This paper develops a structural general equilibrium model to analyse the reactions of the nominal exchange rate and the domestic price level to three types of external shock in emerging economies that have limited access to world capital markets. Although the results depend crucially on the type of external shock, each of the two national balance-sheet parameters considered here —the risk premium and the ratio of external indebtedness— exacerbates the reactions of the two endogenous variables without altering the degree of exchange-rate pass-through (erpt). Moreover, flatter Phillips curves, as observed today in many economies, tend to increase erpt. On the basis of these results, the authorities of emerging economies seeking to stabilize markets and limit erpt are advised to minimize the two risk parameters by applying a flexible inflation-targeting regime.

Effects of higher domestic gas prices in Russia on the European gas market: A game theoretical Hotelling model

Domestic gas prices in Russia are substantially lower than export netback prices. The Russian government aims to increase the domestic price level in the long term. The objective of this paper is to analyse the long-term effects of higher gas prices in Russia on the European gas market. The analysis is based on a modified analytical and a numerical Hotelling model. The main findings are as follows. Under a price elasticity of demand equalling −0.5, a 70% increase in the domestic gas price in Russia results in an annual average reduction in domestic gas consumption of 116bcm. The export supply to Europe could be affected via two channels: (i) a stock effect and (ii) scarcity rents. The results show that in the presence of a stock effect with an elasticity equalling unity, the annual average increase in the export supply to Europe could account for 33.7bcm. Although Russia may not face a resource constraint in the short and medium terms, scarcity effects could become more relevant in the future. A reduction in domestic gas consumption could reduce the future scarcity rent, implying a higher potential for exporting gas in the long term. Overall, total gas consumption in Europe could annually increase by 17.5bcm on average. As the stock elasticity increases, so does the increase in total gas consumption. Furthermore, the results show that increasing the domestic gas price is associated with an annual average increase in the export tax revenue from gas of 38.4billion USD and an annual average reduction in the domestic gas subsidy of 34.1billion USD.

A Study on the Relationship between Exchange Rate and Consumer Prices Based on ECM

One important issue of exchange rate pass-through is the extent to which exchange rate changes affect the prices. This paper studied the pass-through effect of movements in the RMB nominal exchange rate on consumer prices. In particular, we examined whether the exchange rate pass-through to consumer prices was complete or not, and the im- pact of exchange rate system reform had on the pass-through effect. To this end, the paper used the error correction model (ECM) to conduct an empirical analysis from the first season of 1994 to the last season of 2013 period. The results showed that the pass-through of exchange rate changes to consumer prices was incomplete. In the sample period, the ex- change rate pass-through effect was on the overall downward trend. The exchange rate system reform caused structural changes in the pass-through effect. The overall pass-through effect was higher after the reform than before, and the pass- through was lagging. Finally, our results made suggestions to improve Chinese monetary policies. Price stability has become an important objective of the government's macroeconomic policy. Since 2007, China's inflation was high, showing higher inflationary pressures. After the global financial crisis, the inflation rate fell, how- ever, the major developed countries implemented quantita- tive easing monetary policy, inflation rose sharply. Signifi- cant fluctuations in the price level are the results of a variety of internal and external factors, with the increase of opening degree, the exchange rate has become an important channel for external shocks affecting the domestic economy. With the implementation of the exchange rate system reform, ex- change rate volatility increased, after sustained appreciation of the longer period of time, the RMB exchange rate in the recent period appeared sharp depreciation. Exchange rate changes may cause fluctuations in the domestic price level, i.e. the exchange rate pass-through. Exchange rate pass- through is a hot issue in the field of international economics, in which, an important issue is the extent to which exchange rate changes affect the prices (1, 2). In this paper, we investigated the pass-through effect of movements in the RMB exchange rate on consumer prices. In particular, we examined whether RMB exchange rate pass-through to consumer prices was complete or not, and the impact of the exchange rate system reform had on the pass-through effect. To the end, we applied the error correc- tion model (ECM) to conduct an empirical analysis from the first season of 1994 to the last season of 2013 period. This method can efficiently capture both the long-term and short- term dynamic changes in variables. It also maintains the long-term dynamic information of the relationship between variables, and ensures the effectiveness of the regression analysis. In the application, this paper introduced dummy variables into the model. Furthermore, it introduced mone- tary policy variable into the model, and selected foreign price index constructed to measure the cost of foreign ex- porters. This model took a lag respectively considering ex- change rate and monetary policy variables have lagged ef- fects on the price index. The results showed that the pass- through of exchange rate changes to consumer prices was incomplete. Long-term effect of exchange rate pass-through to consumer prices was -0.19. The degree of exchange rate pass-through was quite slow. In the sample period, the ex- change rate pass-through effect was on the overall downward trend. The exchange rate system reform caused structural changes in the pass-through effect. The overall pass-through effect was higher after the reform than before, and the pass- through was lagging. The remaining parts of the article are organized as fol- lows: Section 2 reviews and summarizes the existing litera- ture; Section 3 presents a theoretical model that has been constructed for studying exchange rate pass-through to con- sumer prices; Section 4 presents the empirical results; Sec- tion 5 provides the main conclusions. 2. LITERATURE REVIEW

Pharmaceutical Pricing in Europe: Is Differential Pricing a Win-Win Solution?

Most European Member States, particularly the former EU15 countries, have national systems providing universal access to health care, including pharmaceuticals. Given pressure on public budgets and rising expenditure for healthcare, national governments have introduced mechanisms to regulate healthcare services provision and set prices of pharmaceuticals. As pointed out by the 2008 OECD Report on Pharmaceutical Pricing Policies (OECD, 2008), one of the policies pursued to constrain pharmaceutical prices is International Reference Pricing (IRP). This uses prices paid in other countries as a benchmark for setting domestic price levels. For example, in Spain the Ministry of Health set prices based on, among other factors, the price of the same medicine established in the other 26 EU countries.Traditionally, there has been only limited use by higher income countries of lower income countries’ prices. However, there is evidence that this is changing, mainly due to the increasing financial difficulties faced by some EU Member States. The objective for governments is to “import” low pharmaceutical prices from other countries to reduce their own health care expenditures. Greece, in its response to economic crisis in 2010, introduced a series of new regulations to decrease pharmaceutical prices. After initial temporary price cuts, causing two pharmaceutical companies to withdraw their products (Watson, 2010), Greece implemented an IRP system where prices are reviewed and set three times per year based on the average of the three lowest prices available in 22 EU countries (the EU 27 excluding Denmark, Estonia, Malta, and Sweden) leading to an average price reduction of the reviewed products of 20% (IMS Pharma Pricing and Reimbursement, November 2010).At the other end of the economic spectrum, Germany, the EU Member State with the strongest economy, in an effort to reduce its health budget, has endorsed a series of proposals to reform the market for pharmaceuticals and, in particular, its price-setting system. The bill endorsed by the German parliament in late 2010 will significantly limit the ability of companies to set the price of newly approved pharmaceutical products by introducing, among other measures, the use of IRP. The European Commission is trying to support the interest of Member States in IRP by facilitating the exchange of information on prices paid for pharmaceuticals amongst Member States.