Inflation Episodes Research Articles

Profit produced by post-pandemic inflation: Evidence from an emerging economy

This paper focuses on the post-pandemic inflationary context, providing further details on how rising corporate profits contribute to the inflationary process in Türkiye. Using quarterly data from 2010 to 2022, we extend the existing literature by employing the Quantile ARDL method to assess the roles that both cost-push and demand-pull factors play in post-pandemic inflation. The chosen empirical strategy is motivated by the main objective of the study, as it allows us to quantify how the factors contributing to inflationary process differ when comparing periods of high inflation (higher quantiles) with periods of low inflation (lower quantiles). The empirical findings support the idea that the drivers of Turkish inflation are context-dependent, with specific causes emerging during inflationary episodes. The results show that cost-push factors, rather than demand-pull factors, are the main cause of the post-pandemic inflation surge in Türkiye. Our estimation results show that the coefficient for interest rates in Türkiye is only -0.42 %, while the corresponding figure for the profit share is 5.26 %, indicating that the effect of the profit share is 12 times greater than that of interest rate. We also find evidence of conflict and profit-driven inflation, confirming that the post-pandemic inflation surge in Türkiye is largely driven by cost-push factors and rising profits.

Discussion of “Understanding the international rise and fall of inflation since 2020”

This discussion comments on the ambitious paper, “Understanding the International Rise and Fall of Inflation Since 2020,” by Mai Chi Dao, Pierre-Olivier Gourinchas, Daniel Leigh, and Prachi Mishra. The strengths of the DGLM paper are manifest. There is much to learn from it, both about the commonalities of the inflation experiences of this large group of important countries and their differences, and I draw some lessons and policy implications. I will suggest that one could have learned even more if the authors had devoted some of their effort to comparing the recent global inflation episode to earlier experiences, and if they had related their empirical specification and results to predictions of models with search frictions.

Inflation and Fiscal Policy: Is There a Threshold Effect in the Fiscal Reaction Function?

Abstract The euro area, like other advanced economies, faced high inflation over the past years. We analyse empirically the impact of inflation on public finances in the euro area, focusing on the question of whether at such high levels, inflation could have a different impact on the primary budget balance. To this end, we estimate a fiscal reaction function for euro area countries and find evidence of non-linear short-term effects of HICP inflation on the primary balance. Over the period 1999–2022, we unveil an inverse U-turn relationship and an inflation turning point – beyond which its short-term (contemporaneous) impact on the primary balance starts being negative. These results reflect primarily the most recent high inflation episode and indicate that in such conditions inflation can be costly for public finance flows even in the shorter run.

The post-COVID inflation episode

This study examined the recent inflation episode in the US using an estimated NK-DSGE model with endogenous unemployment fluctuations. We find that the US price inflation accelerated due to a sudden wage increase during the COVID-19 lockdown, the 2021 expansionary monetary policy, and price-push shocks in the quarters of a global surge in energy costs. The disinflation path predicts that further indexing prices or wages to lagged inflation will lead to higher wage inflation and slower price disinflation. Moreover, severely tightening the Fed’s monetary policy will only slightly reduce inflation but increase unemployment.

Global inflation: modern determinism and challenges for policy

The article studies global inflation determinants, causing it in recent decades and at the present stage under the influence of cascading shocks in world economy and financial system. The relevance of the problems summarized and analyzed in the article is explained by the significant risks of the inflation duration at the present stage, which is affected by an increasing number of shocks from demand, supply, and global financial system. In these conditions, even adaptive monetary policy may cease to be effective. The purpose of the study is to assess the nature and extent of developed and developing countries’ economies vulnerability due to inflationary shocks and to identify the inflation fundamental determinants in crisis conditions on the basis of retrospective analysis. Achievement of the goal implied the solution of such priority tasks as: global inflation dynamics factors identification considering the risks of stagflationary and recessionary trends in world economy; inflation new determinants identification in the context of changes in the scale and structure of the global financial market; assessment of monetary policy adjustment and adaptation mechanisms in the current inflationary environment; consideration of the current nature of supply and demand shocks and their impact on global inflation. The current inflationary shock is unprecedented, and the study assesses it in its historical context and for its similarities and differences with significant inflation episodes observed in the post-war decades. The key factors of inflation at the present stage have been analyzed in their relationship with the monetary policy key trends.

N-of-1 Trial of Angina Verification Before Percutaneous Coronary Intervention

BackgroundIn stable coronary artery disease, 30% to 60% of patients remain symptomatic despite successful revascularization. Perhaps not all symptoms reported by a patient with myocardial ischemia are, in fact, angina. ObjectivesThis study sought to determine whether independent symptom verification using a placebo-controlled ischemic stimulus could distinguish which patients achieve greatest symptom relief from percutaneous coronary intervention (PCI). MethodsORBITA-STAR was a multicenter, n-of-1, placebo-controlled study in patients undergoing single-vessel PCI for stable symptoms. Participants underwent 4 episodes (60 seconds each) of low-pressure balloon occlusion across their coronary stenosis, randomly paired with 4 episodes of placebo inflation. Following each episode, patients reported the similarity of the induced symptom in comparison with their usual symptom. The similarity score ranged from −10 (placebo replicated the symptom more than balloon occlusion) to +10 (balloon occlusion exactly replicated the symptom). The primary endpoint was the ability of the similarity score to predict symptom relief with PCI. ResultsFifty-one patients were recruited, aged 62.9 ± 8.6 years. The median fractional flow reserve was 0.68 (Q1-Q3: 0.57-0.79), and the instantaneous wave-free ratio was 0.80 (Q1-Q3: 0.48-0.89). The median similarity score was 3 (Q1-Q3: 0.875-5.25). The similarity score was a strong predictor of symptom improvement following PCI: a patient with an upper quartile similarity score of 5.25 was significantly more likely to have lower angina frequency at follow-up (OR: 8.01; 95% credible interval: 2.39-15.86) than a patient with a lower quartile similarity score of 0.875 (OR: 1.31; 95% credible interval: 0.71-1.99), Pr(difference) >99.9%. ConclusionsSimilarity score powerfully predicted symptom improvement from PCI. These data lay the foundation for independent symptom mapping to target PCI to those patients most likely to benefit. (Systematic Trial of Angina Assessment Before Revascularization [ORBITA-STAR]; NCT04280575)

Brazilian Stagflation

Alexandre Tombini, the governor of the Central Bank of Brazil, faced a difficult situation in July 2015. Inflation was in the double digits, well above the target rate of 4.5%, and unemployment had increased from around 4.5% a year prior to nearly 8%. Any actions Tombini took to control inflation would most likely exacerbate unemployment, at least in the short run. To further complicate matters, Tombini's office was not independent of the executive branch of Brazil's government, and Tombini faced the possibility that any of his actions that were not aligned with the priorities of the current administration could cost him his job.This case follows classes on fiscal and monetary policy in normal times and is the first class in a sequence on macroeconomic challenges–in this case, stagflation–high inflation and high unemployment. Students are pushed to consider why macroeconomic stabilization involves such acute and unpleasant tradeoffs during episodes of high inflation and unemployment. Students use the IS/LM AD/AS model as a reference.

La reacción de los hogares ante el repunte de los precios en España y en la UEM

Rationale Faced with the recent inflationary episode, households have employed different strategies to adjust their consumption, saving and labour supply decisions in response to higher prices. This article discusses what those strategies have been and how they have varied based on household characteristics. Takeaways •The strategies most widely used by households to cope with the price increases, both in Spain and in the euro area, were shopping around for better alternatives (e.g. offers) and reducing their saving and spending levels. •Spanish households have resorted to credit and increased their labour supply (by taking a second job or working longer hours) to cushion the impact of higher prices on consumption more than their euro area counterparts. This is especially true among households with low liquidity buffers. •Young people, women, people with a lower educational level and those living in rented housing have showed a greater propensity to work more hours to cope with inflation.

Ground deformations associated with an overpressurized hydrothermal systems at Azuma volcano (Japan) revealed by InSAR data

Inflations at active volcanoes are indicators of overpressure in the subsurface, which is known to be a phenomenon that precedes eruptions. Volcanic overpressure is induced by the injection of magmatic fluids, accumulated magma, or heat supply from greater depths. Azuma volcano (Japan) has experienced several episodes of volcanic unrest with increases in seismicity at the depth of the hydrothermal system, implying a potential increase in phreatic eruptions. The time series of interferometric synthetic aperture radar data, associated with the unrest episodes occurring in 2014–2015 and 2018–2019, revealed spatiotemporal variations of inflation episodes, centered around Oana crater, the most active fumarole of Azuma volcano. The modeled best-fit geometry of the elongated pressure source for the local deformation has the same dip as the overlying topographic slope direction and angle around Oana crater, suggesting the existence of topography-correlated layered structures within the hydrothermal system. In contrast, the broader deformation associated with the 2014–2015 unrest was explained by the overpressure of a horizontal flat source at 360–1500 m below sea level, showing the similar depth of the top as the conductive low-resistivity or low-viscosity body suggested by previous studies. The unrest episodes were thus interpreted as resulting mainly from the supply of magmatic fluids, or the transfer of heat from greater depths. Our study helps in understanding the shallow structure of this volcanic system and contributes to evaluating the potential for forthcoming eruptions in Azuma volcano.Graphical

Inflated Concerns: Exposure to Past Inflationary Episodes and Preferences for Price Stability

Inflated Concerns: Exposure to Past Inflationary Episodes and Preferences for Price Stability

2021–2023 Unrest and Geodetic Observations at Askja Volcano, Iceland

AbstractUnrest began in July 2021 at Askja volcano in the Northern Volcanic Zone (NVZ) of Iceland. Its most recent eruption, in 1961, was predominantly effusive and produced ∼0.1 km3 lava field. The last plinian eruption at Askja occurred in 1875. Geodetic measurements between 1983 and 2021 detail subsidence of Askja, decaying in an exponential manner. At the end of July 2021, inflation was detected at Askja volcano, from GNSS observations and Sentinel‐1 interferograms. The inflationary episode can be divided into two periods from the onset of inflation until September 2023. An initial period until 20 September 2021 when geodetic models suggest transfer of magma (or magmatic fluids) from within the shallowest part of the magmatic system (comprising an inflating and deflating source), potentially involving silicic magma. A following period when one source of pressure increase at shallow depth can explain the observations.

An extended Taylor rule for a small open African economy

This paper estimated a monetary policy rule for Nigeria by augmenting the traditional Taylor rule model, using data spanning 2010Q1 to 2023Q2 in a Dynamic Ordinary Least Square regression. The results from competing models – the Taylor rule and extended Taylor rule (exchange rate augmented) – were subjected to forecast evaluation to ascertain their relative predictive power. Same models were estimated for South Africa for the purposes of comparison, and the results were consistent with Nigeria's. The findings indicate the predictors of the policy rate – monetary policy inertia, inflation, output gap and exchange rate – to be significant and with the expected signs. Forecast evaluation of the estimated extended Taylor rule model produced lower Root Mean Square Error (RMSE) and Theil statistics, compared with the traditional Taylor rule model, reflecting the higher predictive power of the former. The baseline and unequally-weighted two-quarter-ahead forecast of the extended model predicts a maximum inflation rate of 20.77 % and 21.04 % in 2023Q3 and 2023Q4, respectively, suggesting lower inflationary episode for Nigeria. The implication of the finding is that the extant monetary policy rule based on the traditional Taylor rule is inadequate in setting the nominal interest rate by the Central Bank of Nigeria, and recommends the adoption of the extended Taylor rule to enhance the effectiveness of monetary policy in Nigeria.

Інфляція як мірило незалежності центральних банків

The aim of the article is to study the process of formation of the modern paradigm of independence of central banks, determine the role of inflation in it, outline the criteria for independence and determine the dynamics of legal indicators of autonomy of monetary institutions. It is noted that the impetus for changes in relations between governments and central banks of many industrialized countries was the episodes of high inflation in the 1970s. Awareness of the problem of the time discrepancy between the short-term perspective of political decisions and their long-term impact on the economy provoked institutional changes in the status of monetary institutions. They envisaged the prioritization of central banks’ activities to ensure a consistently low level of inflation and provide independence to achieve it. It is also noted that in countries with economies in transition, the tendency to separate central banks into an independent institution was implemented during the 1990s. The criteria for the independence of central banks are determined by legislation and their charters. These usually include the following: isolation of central bank leadership from political pressure; prohibition to give instructions to central banks in the conduct of monetary policy; a clearly defined purpose of monetary policy; restrictions on lending to government programs and budget deficits. In addition to the formally defined independence, there is also the actual independence of central banks, which is usually outlined through the index of management turnover of monetary institutions and its correlation with the inflation rate. But this does not take into account other (exogenous) factors that affect the inflation rate, which makes the studies less relevant. In addition, the construction of any indices includes an arbitrary weight value of each of them, which reflects the sensitivity of the results obtained depending on their composition. As noted in the study, instead of a static analysis of the indicators of independence of central banks, it is more expedient to determine their modification from the beginning of the formation of the modern paradigm of independence to the present day. The analysis showed that since the beginning of the 1970s, most of the countries studied have changed the rules prohibiting central banks from financing (in any form) the budget deficit. At the same time, obstacles to interference in monetary policy were established. This suggests that the change in these criteria had the greatest impact on the downward trend in the level and volatility of inflation in the period under study.

US Economic Growth Potentia

This article covers the current problems of US economic growth. The policy instruments that President Biden administration uses in pursuit of the strategic objectives of influencing US economic growth are being discussed. Joseph Biden administration macroeconomic priorities are reflected in the 2023 Economic Report of the President, which calls for stimulating economic growth. The article shows that economic growth is constrained when the size of the economy reaches what economists call “potential gross domestic product (GDP)” or “capacity.” An economy’s long-run capacity depends on such factors as a growing and skilled labor force, high-quality physical infrastructure, and the efficiency of the production process. Current situation on labor market and capital market is being discussed. Actions that affect these markets can either constrain or enhance the capacity of the economy over time. Investing in increased economic capacity enables the economy to accommodate more demand in the medium to long run, which can make it more resilient to economic shocks and minimize the risk of inflationary episodes. The core of the Biden-Harris Administration’s economic agenda is building a foundation for steady, sustainable, and shared growth by increasing economic capacity. To expand the potential growth of the U.S. economy, policymakers need to adjust how the Nation invests in response to negative changes. In some areas changing economic and social context calls for a new approach to increasing the capacity for economic growth. This article discusses how the relevant context in these areas has changed, analyzes pressing current challenges to sustained economic growth, and highlights potential strategies to confront these challenges.

Monetay Unions and High Inflation Episodes (HIEs)

Monetay Unions and High Inflation Episodes (HIEs)

Which Policies Against Inflation After Covid-19 and the War in Ukraine: The Italian Case

ABSTRACT The aftermath of the pandemic crisis and the war in Ukraine have revived the debate on the causes and consequences of inflation, as well as the policies needed to combat its effects. Despite the obvious absence of a role for monetary policy in triggering price rises, the response of monetary authorities, especially in the Eurozone, has been conventional: raising interest rates, with negative consequences for activity levels. In this paper we argue that the inflation episode we are witnessing is a consequence of the attempt by profit-makers to maintain the same (if not higher) levels of profitability as before. It is, therefore, a case of conflict inflation. The policies needed to avoid severe consequences for the weakest sections of the population should be aimed at compensating workers against the loss of purchasing power. In this context, Italy is a case study. It is one of the few advanced countries where there is no statutory minimum wage. Considering data from the main studies on the conditions of Italian workers and building our argument on the most recent economic theory, we stress the need for the introduction of a legal minimum wage in Italy and, in general, for upstream redistribution policies.

Energy shocks and inflation episodes in the UK

This paper explores the potential macroeconomic impacts of the recent episode of global energy shock in the UK economy. Unlike the Great Inflation in the 1970s, current inflation is likely to have limited impacts on the overall UK economy due to institutional changes, such as the weakening of collective wage bargaining, etc. As a result, we argue that the current episode of inflation requires limited interventions using monetary policies. A new macro-econometric forecasting model is developed for the UK economy to simulate counterfactual policy scenarios.

How credible is average and symmetric inflation targeting in an episode of high inflation?

This article examines the risks and societal costs associated with flexible average inflation targeting in the United States and symmetric inflation targeting in the Eurozone. Employing an empirical approach, we analyze monthly cumulative inflation gaps over a monetary policy horizon of 36 months. By investigating the trajectories of the cumulative inflation gaps, we find a heavy tailed distribution and a 20 percent probability of over- and undershooting the inflation target. We exhibit that the offsetting mechanism introduced in the revised monetary strategies lack credibility in ensuring price stability during a period of persistent inflation. Consequently, the credibility of central banks may be compromised. The policy implications are the integration of an escape clause and prompt monetary corrections in cases where the inflation goal is not achieved. This study provides insights for policymakers and central banks, emphasizing challenges in maintaining credibility and price stability within the new monetary strategies.

Re-Examining the South African Reserve Bank’s Policy Reaction Function Using the NARDL Model

The 3–6 percent inflation target is a policy rule used by the South African Reserve Bank (SARB) to fulfil its statutory obligation of ensuring a low and stable inflation environment and its policy reaction function assesses how the Reserve Bank responds to deviations of inflation from its target. We rely on nonlinear autoregressive distributive lag (NARDL) models to estimate the asymmetric preferences which the Reserve Bank has to inflation deviations during rising and falling episodes of inflation. Using quarterly data spanning from 2002:q1 to 2021:q4, we estimate the policy reaction functions using 7 disaggregated measures of inflation to capture the heterogeneity in the formation of price expectations. We further segregate our data into two sub-periods, corresponding to the pre-crisis and post-crisis era, as a robustness exercise. Overall, our findings indicate that in the post-crisis era the SARB (i) has become more responsive to inflation, output fluctuations and exchange rates and (ii) has responded more aggressively to rising inflation than falling inflation.

Energy price shocks, conflict inflation, and income distribution in a three-sector model

The paper presents a model of conflict inflation to investigate the distributional effects of energy price shocks. We argue that periods of high inflation are always periods of significant redistribution of income. We analyse how such redistribution occurs along two dimensions: between workers and firms and between sectors of the economy. To study the distributional outcomes of the recent inflationary episode, we build a three-sector model comprising a domestic energy sector which provides inputs for a goods and a services sector. The model is calibrated to US sectoral data with the Method of Simulated Moments. While energy prices are set internationally, non-energy prices and nominal wages are set by firms and workers, giving rise to conflicting claims over the distribution of income. We consider three shocks that trigger inflationary distributional conflict: an energy price shock combined with demand and supply shocks to the goods sector. We find that the recent inflationary episode constitutes a price-wage rather than a wage-price spiral. The combined shocks induce non-energy firms to raise prices, which undermines real wages, and redistributes income towards firms. The sectoral demand shift towards goods in combination with pandemic-related supply bottlenecks further raises mark-ups, accelerating inflation and leading to divergence in sectoral profit margins. We compare three anti-inflationary policies: redistributing windfall profits to workers, nominal wage restraint, and aggregate demand contraction through monetary or fiscal policy. The redistribution of profits via a windfall tax is most effective in reducing inflation without reinforcing reductions in employment and labour shares.