Periods Of High Inflation Research Articles

Commodity prices and inflation risk

SummaryThis paper investigates the role of commodity price information when evaluating inflation risk. Using a model averaging approach, we provide strong evidence of in‐sample and out‐of‐sample predictive ability from commodity prices and convenience yields to inflation, establishing clear point and density forecast performance gains when incorporating disaggregated commodities price information. The resulting forecast densities are used to calculate the (ex‐ante) risk of inflation breaching defined thresholds that broadly characterize periods of high and low inflation. We find that information in commodity prices significantly enhances our ability to pick out tail inflation events and to characterize the level of risks associated with periods of high volatility in commodity prices.

Cykl koniunkturalny w Turcji w latach 2005–2020 — interpretacja austriackiej szkoły ekonomii

Turkey was hit by the recession, defined in a classic way (as negative real GDP growth lasting at least two quarters), three times over the discussed period. The main goal of the central bank of Turkey is to keep inflation as close as possible to the inflation target. The use of the interest rate as a tool to stabilize the economic situation is therefore limited. The country has experienced periods of high inflation which was not temporary, but long-term. Using the approach appropriate to the Austrian School of Economics, the article analyzes the behavior of the Turkish economy in 2005–2020. In the discussed time horizon, two phases of the business cycle have been identified according to the Austrian School of Economics — the first from 2005 to the first quarter of 2014, and the second from the second quarter of 2014 to 2020. It can be assumed that the Turkish economy will enter the third phase of the business cycle in the near future, although it is difficult to determine when it will happen.

Inflation Dynamics in Pakistan

This study explains the correlation among consumer price behavior and inflation in Pakistan by employing weekly micro data of retail price survey from October 2013 till September 2016, which is considered as the period of high inflation. Inflation is a product of extensive margin (the frequency of price change) and intensive margin (magnitude of price change). The study decompose the variance of inflation into contribution from both margins thus to determine if the prices of various groups of commodities follows State dependent pricing model or Time dependent pricing model. The extensive margin is a source of inflation in most of the State dependent pricing model while intensive margin is a basis of inflation in Time dependent pricing model. The analysis reveals a greater correlation of inflation with the intensive margin of price change compared to the extensive margin. Mounting inflation is although related more with greater frequencies of the price increase and lower frequency of price decrease, however, the size of the price increase and decrease also plays an important role. Findings of the study reveals important role of price change behavior in explaining the inflation dynamics and are believed to assist policy makers in assessing the pricing mechanism and inflation dynamics in Pakistan

Asymmetric Fisher effect in inflation targeting emerging markets: evidence from quantile co-integration

ABSTRACT We test Fisher hypothesis in 14 inflation targeting emerging countries by quantile co-integration approach allowing asymmetric behaviour of long-run co-integration relationship. While conventional co-integration methods do not support Fisher hypothesis for any country, quantile co-integration approach confirms Fisher hypothesis in nine countries with time-varying behaviour of Fisher coefficient. Our results thereby can shed light on Fisher puzzle in inflation targeting emerging markets and provide insightful implications. The findings suggest that inflation targeting in emerging markets would lead to an asymmetric adjustment, implying heterogeneous effects of negative and positive shocks. Monetary authorities, in particular, tend to increase short-term interest rates by a larger amount during high inflation period than low inflation period.

Budget deficits, money growth and inflation: empirical evidence from Vietnam

PurposeThis paper aims to uncover the nexus between budget deficits, money growth and inflation in Vietnam in the period 1995–2012.Design/methodology/approachThe paper uses a structural vector auto-regressive model of five endogenous variables including inflation, real GDP growth, budget deficit growth, money growth and the interest rate.FindingsIt is found that inflation rose in response to positive shocks to money growth and that budget deficits had no significant impact on money growth and therefore inflation. This empirical evidence supports the hypothesis that fiscal and monetary policies were relatively independent. Money growth significantly decreased in response to a positive shock to inflation; interest rates had no significant effect on inflation but considerably increased in response to positive inflation shocks. This implies that the monetary base was more effective than interest rates in fighting inflation.Originality/valueThis paper sheds light into understanding the link between budget deficits, money growth and inflation in Vietnam during the high-inflation period 1995–2012. The finding supports the hypothesis that fiscal and monetary policies were relatively independent over the period.

The price adjustment hazard function: Evidence from high inflation periods

The price adjustment hazard function - the probability of a good’s price changing as a function of its price misalignment - enables the examination of the relationship between price stickiness and monetary non-neutrality without specifying a micro-founded model, as discussed by Caballero and Engel (1993a, 2007). Using the micro data underlying the U.S. Consumer Price Index going back to the 1970s, we estimate the hazard function relying on empirical patterns from high and low inflation periods. We find that the relation between inflation and higher moments of the price change distribution is particularly informative for the shape of the hazard function. Our estimated hazard function is relatively flat with positive values at zero. It implies weak price selection and a high degree of monetary non-neutrality: about 60% of the degree implied by the Calvo model, and much higher than what menu cost models imply. In addition, our estimated function is asymmetric: price increases are considerably more likely to occur than price decreases of the same magnitude.

World Economic Prospects Monthly

Overview: Service sector takes over the growth baton ▀ We have nudged up our world GDP growth forecast for 2021 to 6.4% from 6.3% previously and continue to expect a healthy gain of 4.6% in 2022. Our above consensus outlook for global economic growth both this year and next continues to be supported by recent activity developments. ▀ Recent news on Covid cases have been positive, as global case numbers are almost back down to their March lows, and economic data have continued to consistently beat economists' expectations on the upside. Business surveys indicate that the healthy rebalancing of the global economy away from manufacturing and towards services is continuing. The global services PMI remains comfortably ahead of the manufacturing headline index for a second consecutive month after rising in May. ▀ We continue to expect a strong global growth rebound in Q2 as the Chinese economy regains momentum and advanced economies benefit from a relaxation in activity restrictions and the resulting release of pent‐up demand by households. Non‐Chinese emerging markets are likely to see GDP growth slow in Q2 because of a surge in Covid cases, most notably in India, but growth should improve in H2. ▀ We have raised our CPI inflation forecasts to reflect the strengthening recovery, supply bottlenecks, and rising cost pressures. At a global level, we now expect inflation to average 3.8% this year, the strongest annual rise since the 2011/2012 period. ▀ Although there has been plenty of talk about a new inflation regime, we still think there is only a small chance of the current inflation pick‐up marking the start of a sustained period of high inflation. For most economies, we continue to believe the current rise in inflation is a response to temporary supply and demand dynamics that will start to subside as we move into 2022.

Forecasting annual inflation in Suriname

For many countries, statistical information on macroeconomic variables is not abundant and, hence, creating forecasts for a key variable like inflation can be cumbersome. This paper addresses the creation of current year forecasts from a MIDAS regression for annual inflation rates in Suriname where monthly inflation rates are the explanatory variables, and where the latter are only available for one and a half decade. The constructed model associates with a hybrid New-Keynesian Philips curve (NKPC). Specific focus is given to the forecast accuracy in the high inflation period in 2016–2017. The forecasts became very accurate when the models included data from May onwards. A particular parameter restriction was also useful to improve forecast accuracy.

The openness-inflation puzzle: an asymmetric approach

ABSTRACT The paper analyzes Inflation Openness (IO) relationship in an asymmetric framework using lag inflation, lag external debt and lag output growth as transition variables. Considering a Panel Smooth Transition Regression (PSTR) model with annual data of 41 developing countries for a period of 45 years from 1972 to 2016, we found a clear negative relationship between inflation and openness. This relationship becomes strong during periods of high inflation, high output growth and low external debt. We argue that though openness reduces inflation, its impact varies depending upon the state of the economy. We conclude that analysing the IO relationship using a linear framework may result in inaccurate and misleading outcomes.

How Do the Volatilities of Rates Depend on Their Level? The “Universal Relationship” Revisited

The authors present a straightforward extension valid in the current negative-rate regime of the “universal relationship” uncovered in De Guillaume, Rebonato, and Pogudin (2013) between the level of rates and their volatility. They also provide an explanation of the origin of this relationship by showing the existence of two sharply distinct regimes for the volatility of real rates as a function of real rate levels, and by linking periods of high inflation with periods of high real rates. Finally, they provide evidence that the “volatility of volatility” also displays a “universal” behavior, with a significant linear dependence on the level of rates (and of the volatility itself). <b>TOPICS:</b>Fixed income and structured finance, statistical methods, volatility measures, developed markets <b>Key Findings</b> ▪ The universal relationship, across currencies and tenors, between volatilities and the level of rates first presented in De Guillaume, Rebonato, and Pogudin (2013) also applies to the extremely low-rate environment of the last decade, and this article presents a simple extension of the relationship to handle the case of negative rates. ▪ The authors explain the origin of this relationship by showing the existence of two sharply distinct regimes for the volatility of real rates as a function of real rate levels, and by linking periods of high inflation with periods of high real rates. ▪ They show that the “volatility of volatility” also displays a “universal” behavior, with a significant linear dependence on the level of rates (and of the volatility itself).

Taylor Rules and Liquidity in Financial Markets

Nous revisitons l’histoire de la politique monétaire américaine dans le cadre d’une règle de Taylor, en utilisant des données et des informations de marché en temps réel. Nous constatons une instabilité importante des paramètres de la fonction de réaction de la Federal Reserve à l’écart de production et aux espérances d’inflation. Motivé par la crise financière mondiale et l’attention croissante portée aux marchés financiers, nous étudions le rôle de la liquidité dans la règle des taux d’intérêt. Nous estimons les modèles de commutation de Markov et constatons la conformité au principe de Taylor pendant la période d’inflation élevée pour une règle de Taylor standard et des violations cohérentes du principe de Taylor une fois que nous avons inclus des procurations pour la liquidité. Ces violations ne sont pas associées à des périodes d’inflation non ancrée.

Estimating the price of apartments in Tehran using extracted compound variables

PurposeHousing price is a barometer of a national economy. In recent years, Iran experienced high inflation in its economy, which affects everything, including housing. The purpose of this study is the estimation of the value of residential apartments of Tehran using ordinary least square (OLS) and geographically weighted regression (GWR) methods.Design/methodology/approachThis paper proposed a method for determining the compound variables and used them to estimate and evaluate the prices in the district six of Tehran city. Also, this paper compared the GWR and OLS methods with different types of factors and their influences in house price estimations.FindingsDuring the high inflation period of the study period, the age of buildings, inflation, parking, storage room and their locations are the most critical factors that affect the price of apartments in district six of Tehran. Besides, compound variables have the most influence on the prediction of the prices.Research limitations/implicationsThe exact location of the apartments in the study area were unknown. Therefore, the positions are extracted from their addresses. The uncertainty of location forced us to ignore the neighborhood terms in the hedonic method.Practical implicationsThe exact locations of the apartments in the study area were unknown. Therefore, the positions are extracted from their addresses. The uncertainty of location forced us to ignore the neighborhood terms in the hedonic method.Originality/valueThe originality of the proposed method is that it used a different approach to determine the valid variables of the apartment prices. Also, the evaluation of the method showed that the proposed variables are significantly useful.

Sustainable Factor Investing: Where Doing Well Meets Doing Good

This paper investigates the impact of ESG integration on systematic factors in Australia. While excluding non-rated stocks leads to inferior performance, simultaneously exploiting ESG scores with past returns significantly improves the Sharpe ratio and the crash risk profile of the momentum strategy. Such outperformance is more pronounced during periods of slow growth, high inflation and high credit-spreads. The improved performance, which originates from the governance dimension, can be explained by sector tilts driven by ESG integration. Overall, our findings suggest that sustainable factor investing not only allows asset-owners to include their ethical preferences while offering strong potential for wealth generation, but also provides asset managers with the opportunity to mitigate risk.

Sustainable factor investing: Where doing well meets doing good

This paper investigates the impact of ESG integration on systematic factors in Australia. While excluding non-rated stocks leads to inferior performance, simultaneously exploiting ESG scores with past returns significantly improves the Sharpe ratio and the crash risk profile of the momentum strategy. Such outperformance is more pronounced during periods of slow growth, high inflation and high credit-spreads. The improved performance, which originates from the governance dimension, can be explained by sector tilts driven by ESG integration. Overall, our findings suggest that sustainable factor investing not only allows asset-owners to include their ethical preferences while offering strong potential for wealth generation, but also provides asset managers with the opportunity to mitigate risk.

Inflation persistence in Turkey: A TVP-estimation approach

We analyze inflation dynamics in Turkey by estimating inflation persistence for the period 1990–2018. Inflation persistence is defined as the speed with which inflation returns to its equilibrium level (long-term mean) after a shock and we apply a time-varying parameter estimation method based on the Kalman filter. We find that inflation persistence increases and exhibits high volatility in periods of high inflation in which inflation expectations and pricing behaviors are negatively affected. We further find that with institutional changes in the conduct of monetary policy, inflation started to decline after 2003 and inflation became less persistent. Monetary policy appears to be effective at maintaining price stability until 2016. Empirical results show that there is a significant rise in inflation persistence starting in 2016 accompanied by an upward trend in inflation.

Taking the Stag out Stagflation

In this paper we study investigate whether we can time the performance of stock market factors in a profitable manner. In the first part of our paper, we study a trading strategy that buys factors based on a timing strategy. We find that the factor timing strategy experiences lower maximum than our factor portfolio benchmark but does not produce the returns necessary, net of trading costs and 2% management and 20% performance fees, to outperform our factor benchmark. Additionally, the factor timing portfolio plays a very small role in an optimal portfolio that is comprised of a factor timing portfolio and our factor portfolio benchmark. In the second part of our paper, we test whether economic indicators can predict factor timing performance, net of the factor timing benchmark. We find that stagflation (a period of high inflation during a recession) is predictive of the outperformance of our factor timing strategy relative to our benchmark. We form a strategy that engages in factor timing and shorts our factor benchmark the month after a stagflation period is predicted and only buys our factor benchmark during all other times. We find that this strategy produces a Sharpe ratio of 1 and is negatively correlated to both stocks and bonds. We interpret this result as a discovery of a point of market inefficiency.

Global liquidity, money growth and UK inflation

This paper uses tools from the classical theory of inflation for UK Consumer Price Inflation from 1970Q1 to 2017Q4. In particular, we adopt augmented Phillips curve type equations within a linear and regime-switching framework where regimes are governed by previous inflation rates. Our non-linear models show that a monetary explanation of inflation is prominent during periods of high inflation. However our models imply that during periods of high inflation, The Bank of England should monitor monetary conditions in conjunction with monetary policy stance; as these can help dampen inflation persistence.

Does Money Illusion Delude Investors?

This study investigates the role of money illusion in a broad set of anomaly-based strategies. To the extent that anomalies reflect mispricing, I examine whether money illusion predicts anomaly returns. I find that, following periods of high inflation, anomalies are stronger and returns in short leg portfolios are lower. However, following periods of deflation, returns in short leg portfolios are not lower and long-short strategies are not profitable. These findings indicate that money-illusioned investors excessively extrapolate the upside potential of stocks in short leg portfolios following periods of high inflation and, subsequently, experience negative returns. I find the effect of money illusion to remain largely unchanged after controlling for sentiment. Overall, this study presents evidence that money illusion leads to mispricing in the stock market.

The Link between Labor Cost and Price Inflation in the Euro Area

This paper documents, for the first time in a systematic manner, the link between labor cost and price inflation in the euro area. Using country and sector quarterly data over the period 1985Q1-2018Q1 we find a strong link between labor cost and price inflation in the four major economies of the euro area and across the three main sectors. The dynamic interaction between prices and wages is time-varying and depends on the state of the economy and on the shocks hitting the economy. Our results show that it is more likely that labor costs are passed on to price inflation with demand shocks than with supply shocks. However, the pass-through is systematically lower in periods of low inflation as compared to periods of high inflation. These results confirm that, under circumstances of predominantly demand shocks, labor cost increases will be passed on to prices. Coming from a period of low inflation, however, this pass-through could be moderate at least until inflation stably reaches a sustained path.

On the determinants of long-run inflation uncertainty: Evidence from a panel of 17 developed economies

Based on a cross section of 17 advanced economies and data for the period 1975 to 2015, we examine how the interaction between monetary policy and macroeconomic conditions affects inflation uncertainty in the long-term. We construct a proxy for the unobservable inflation uncertainty based on the slowly evolving long-term variance component of inflation from a Spline-GARCH model (Engle and Rangel, 2008). We show that long-run inflation uncertainty is high if an inflation-tolerant central bank governor is in power during a period of high inflation, if the policy rate is below the one that is prescribed by the Taylor rule and during times of heightened stock and exchange rate volatility.