Periods Of High Inflation Research Articles

Spot Commodities as Inflation Protection

Inflation degrades the function of the U.S. dollar as a storehouse of value. The goods and services that constitute the cost of living become more expensive in dollar terms. Physical commodities, and gold in particular, are often recommended to hedge that risk. The authors cast that popular advice into doubt, showing that inflation hedging with physical commodities is difficult, risky, and ultimately unreliable. Buy-and-hold strategies are impractical for many, and inflation hedging with commodities requires bold and successful management, together perhaps with good luck. After examining 53 years of spot prices for 45 commodities and 14 commodity aggregate indices, they find that owning certain things—specific commodities—rather than dollars would have been a better storehouse of value in the inflationary 1970s and in the brief period of high inflation from 1989 to 1990. Various commodities performed very differently in different periods, however, and some of the best in one period proved to be the worst in another. A basket of commodities to protect against inflation would be difficult to construct and uncertain as a result. Furthermore, precious metals, often cited as inflation hedges, carry significant timing risks. Finally, even though a diversified basket of energy commodities has performed well under historical inflation, it carries its own risks.

Estimating Purchasing Power Parities from Household Expenditure Data Using Complete Demand Systems with Application to Living Standards Comparison: India and Vietnam

This study departs from the previous literature on purchasing power parity (PPP) by proposing a demand system based methodology for calculating the PPP that takes account of consumer preferences and allows for the substitution effect of price changes. The methodology is used to calculate the PPP between the Indian Rupee and the Vietnamese Dong. The study allows for regional variation in preferences and price changes both inside the country and between countries. It proposes and applies a methodology for constructing prices from unit values after adjusting them for quality and demographic effects. The adjusted unit values are used as prices in the demand estimations, and the demand parameter estimates are used to calculate both spatial prices within each country and the PPP between the two countries within a consistent framework. The study illustrates the usefulness of preference consistent methods to calculate the PPP by applying the PPPs to compare living standards between India and Vietnam. The significance of the results follows from the fact that the levels of living comparisons are quite sensitive to the PPP used in converting the Rupee expenditure into Vietnamese Dong. The present results on food PPPs question the relevance of the PPPs from the ICP project in cross-country welfare comparisons especially in a period of high food inflation.

Commodities as Inflation Protection

Inflation degrades the function of the U.S. dollar as a storehouse of value. The goods and services which constitute the cost of living become more expensive in dollar terms. Commodities, and gold in particular, are often recommended to hedge that risk. Our work casts that popular advice into doubt, showing that inflation hedging with commodities is difficult, risky, and ultimately unreliable. Buy and hold strategies are impractical for many, and inflation hedging with commodities requires bold and successful management, together perhaps with good luck. Examining fifty-three years of spot prices for forty-five commodities and fourteen commodity aggregate indices, we find that owning certain things – specific commodities – rather than dollars would have been a better storehouse of value in the inflationary 1970s and in the brief period of high inflation from 1989-90. However, various commodities performed very differently in different periods, and some of the best in one period proved to be the worst in another. A basket of commodities to protect against inflation would be difficult to construct and in result. Furthermore, the precious metals, while often cited as inflation hedges, carry significant timing risks. Finally, a diversified basket of energy commodities has performed well under historical inflation, but carries its own risks.

The Paradox of Rising Dividend Payouts in a Recession: Evidence from Pakistan

This paper applies a probit model to a panel of 319 firms listed on the Karachi Stock Exchange over the period 1999–2010, and finds that changes in inflation have a statistically significant, positive impact on the probability of paying cash and bonus dividends. Inflation induces firms to revalue their assets, which raises their distributable revaluation surplus. This, in turn, serves as a good buffer when distributing cash and bonus dividends, especially during periods of high inflation and the low profitability of firms during a recession. Bonus dividend distribution becomes relatively more attractive for firms in such a scenario because these enhance debt capacity (collateral) through the revaluation of assets and reduce the debt-equity ratio. We also highlight other factors that contribute to the probability of paying cash and bonus dividends.

The Euro Crisis: Mission Accomplished?

The Euro Crisis: Mission Accomplished?

International Practice of Inflation Targeting: Israel as a Case Study

The article deals with the transition to inflation targeting, which is a flexible and relatively new method of monetary policy. The Israeli experience in this field is analyzed. The paper shows that, after long periods of high inflation and disinflation the Bank of Israel has adopted the most efficient and painless for other macroeconomic objectives tools.

Regime Shifts and Inflation Uncertainty in Peru

The link between inflation and inflation uncertainty is evaluated using Peruvian data, in a context of changing monetary policies because of regime shifts. A Markov regime-switching heteroskedasticity model that includes unobserved components is used. The model shows how periods of high (low) inflation accompany periods of high (low) short- and long-run uncertainty in inflation. The results of the model also illustrate how, during the recent period of price stability in Peru, both permanent and transitory shocks in inflation show a decrease in volatility. Finally, a time-varying measure of inflation uncertainty is derived from the estimates, giving additional evidence on the positive link between the level of inflation and its uncertainty.

Inflationary expectations and monetary policy: evidence from Bangladesh

This article first estimates inflationary expectations using a Blanchard–Quah VAR model by decomposing the nominal interest rate into expected inflation and the ex ante real interest rate. Then I utilize this expected inflation along with other macroeconomic variables as inputs to the monetary policy function in a recursive VAR model to identify exogenous policy shocks. To calculate inflationary expectations, I assume that ex ante real interest rate shocks do not have a long-run effect on the nominal interest rate. This article finds that the public expects lower inflation for the future during periods of high inflation. Estimated results from the recursive VAR suggest that a contractionary policy shock increases the real interest rate, appreciates domestic currency, and lowers inflationary expectations and industrial output. However, I find a lagged policy response from Bangladesh Bank to higher inflationary expectations.

The Latin American Cohabitation Boom, 1970–2007

The article describes the rise of unmarried cohabitation in Latin American countries during the last 30 years of the twentieth century, both at the national and regional levels. It documents that this major increase occurred in regions with and without traditional forms of cohabitation alike. In addition, the striking degree of catching up of cohabitation among the better-educated population segments is illustrated. The connections between these trends and economic (periods of high inflation) and cultural (reduction of stigmas in ethical domains) factors are discussed. The conclusion is that the periods of inflation and hyperinflation may have been general catalysts, but no clear indications of correlation were found between such economic factors and the rise in cohabitation. The shift toward more tolerance for hitherto stigmatized forms of conduct (e.g., homosexuality, euthanasia, abortion, singleparent household) is in line with the rise of cohabitation in regions of Argentina, Chile, and Brazil where cohabitation used to be uncommon. Further rises in cohabitation during the first decade of the twenty-first century are expected in a number of countries (e.g., mexico) despite conditions of much lower inflation.

A NOTE ON EXPECTATIONAL STABILITY UNDER NONZERO TREND INFLATION

This study examines the expectational stability of rational expectations equilibria (REE) under alternative Taylor rules when trend inflation is nonzero. We find that when trend inflation is high, the REE is likely to be expectationally unstable. This result holds true regardless of the nature of the data (such as contemporaneous, forecast, or lagged data) introduced in the Taylor rule. Our results suggest that high macroeconomic volatility during the period of high trend inflation can be explained well by introducing the concept of expectational stability.

Money growth and inflation: evidence from post-inflation Bolivia

In this short study, the author presents empirical evidence regarding the relation of money growth and its effect on inflation, for the case of Bolivia. The text describes the situation of the country analysed in terms of monetary policy after one of the worst cases of hyperinflation ever; empirical evidence is presented through two independent estimations, one following the Cochrane-Orcutt procedure, and the other following a Box-Jenkins procedure (ARMA process) that confirms the relation between money growth and inflation in Bolivia using data for the years 1998 to 2010. Evidence confirms the impact of money growth on inflation; the evidence suggests that the level of current inflation in Bolivia has a strong relation with the level of money quantity of two past periods on average. Moreover, the results show that monetary expansion affects the level of inflation in even when controlling for time impacts. The author also tries to assess the impact that a period of high inflation has in the development of growth policies for the case of Bolivia.

Oil Pass-Through to Domestic Prices in Turkey: Does the Change in Inflation Regime Matter?

This paper investigates the existence of oil pass through to inflation under different inflation regimes in Turkey. In order to compare the difference between the oil pass-through effects in the low and high inflation periods we employ Markov Regime Switching Vector Autoregressive (MS-VAR) model as a non-linear estimation framework. The regime-dependent impulse responses do not indicate strong pass through from crude oil prices to inflation in both regimes. However, this channel is working through refined petroleum product prices. The results show that there is a substantial decline in pass-through from refined petroleum prices to inflation as the economy moves from high to low inflation regime. These findings support the hypothesis of Taylor (2000) suggesting that low inflationary environment leads to a low pass-through.

Inflation Uncertainty at Short and Long Horizons: Turkey

Bu makalede Türkiye’deki enflasyon ve enflasyon belirsizliği arasındaki ilişki incelenmektedir. Enflasyonun ekonomiye getirdiği maliyetleri iyice anlayabilme ve bununla bağlantılı politikaların belirlenmesi açısından konu önemlidir. Çalışmada, kısa ve uzun vadeli enflasyon belirsizliği farkını vurgulayan Ball ve Cecchetti’nin (1990) yaklaşımı temel alınarak, Kim (1993) tarafından geliştirilen değişken varyanslı gözlemlenmeyen Markov geçiş rejim modeli uygulanmıştır. Ocak 1995-Ocak 2008 dönemlerini kapsayan görgül sonuçlara göre enflasyon belirsizliği geçici şoklardan kaynaklanmakta, daimi şoklar ise etken olmamaktadır. Kriz öncesi enflasyon ve enflasyon belirsizliği arasındaki pozitif ilişki 2003 yılından itibaren enflasyon hedeflemesi politikalarının uygulanmasıyla kaybolmaktadır. Bununla birlikte daimi şoklardan kaynaklanan zayıf bir enflasyon ve enflasyon belirsizliği kaydedilmektedir. Bu sonuçlar Ball and Cecchetti’nin (1990) önsavını doğrulamamaktadır. Öte yandan yüksek enflasyon döneminde süregelen ve ekonomi politikalarının çok sık değiştirilmesinden ve ekonominin kötü yönetiminden kaynaklanan başarısız para politikalarının 2001 krizi sonrası enflasyon hedeflemesi stratejisinin kararlılıkla uygulanması sonucu etkin hale geldiği vurgulanmaktadır.

The role of monetary aggregates in Chinese monetary policy implementation

Monetary targeting has been abandoned in deregulated and liberalized financial systems. Theoretically, this could imply that emerging markets that have not yet deregulated financial markets could employ monetarist policies. We analyse the case of China, in order to explore whether monetary targeting was in theory a possible policy framework for the central bank, and to glean policy lessons for emerging markets. Employing Svensson's criteria for the selection of intermediate targets, we find that a measure such as M1 fulfils the criteria and can serve as an intermediate target. However, it is also found that the relatively small error between monetary target and actual variables may be due to alternative monetary policy procedures, in particular, the use of ‘window guidance’ credit controls. Next, we test the relevance of the McCallum rule in China, which appears more relevant than the Taylor rule. In particular, we find that the actual movement of M1 fits the McCallum rule reasonably well, even during the high inflation period from 1992 to 1994. This suggests that before the official adoption of M1 as the intermediate target in 1994, the People's Bank of China may have already been ‘practising’ its use by implicitly following the McCallum rule. It is also found that monetary policy was too loose during 1992–1994 and a little too tight during 1998–2002. We conclude that an analysis of the traditional monetary aggregates is insufficient, and research on the role of credit aggregates would appear to be more promising. Meanwhile, policy lessons from our study include that central banks, even in emerging markets that maintain relatively regulated and ‘repressed’ financial markets, cannot rely too much on quantitative monetary aggregates, if traditionally defined.

Modelo de Cagan e quebras estruturais: evidências para o Brasil (1970-94)

Using the model proposed by Cagan (1956), the money demand and prices are investigated in Brazilian high-inflation period between 1970 and 1994. Once the relevant series potentially have structural breaks, cointegration methods which permit changes in the cointegration vector are used. The long-run relationship between the relevant series is also used to test the presence of rational bubbles, the hypothesis of maximization of the revenues with inflation tax and the validity of rational expectation hypothesis. Finally, in an unusual approach in this literature, noise measures are calculated with respect to money demand. In Brazilian case a large portion of the variation in money demand are explained by such shocks.

Modelling Inflation Using Markov Switching Models: Case of Poland, 1992-2005

We investigate inflation in Poland in the period of economic transition by examining the potential application of Markov Switching Models to model the inflation generating process in Poland. The time horizon of analysis was limited to the period between March 1992 and October 2005 defined as the process of disinflation, i.e. the process of continued decrease in inflation rates following the economic transition period in early 1990s which was accompanied by a high level of inflation. According to the Ball-Friedman hypothesis, variation of inflation during periods of high inflation can be unstable. Indeed, the results show that non-linear models significantly improve the description of inflation generating process in Poland. Apart from univariate Markov Models, we also use a model that incorporates inflation expectations measured by Future Inflation Indicator (FII). We find that the model, where lagged values of FII are included as exogenous variables is significantly better in modelling inflation than simple univariate Markov Model.

Protection Potential of Commodity Hedge Funds

In this article, the authors show that investing in a portfolio of commodity hedge funds yields higher returns and a better control of downside risk than investing in long-only commodity indices. They also show that, contrary to a widespread belief, long-only commodity indices do not necessarily provide an efficient inflation hedge during periods of high inflation and may induce a cost in low inflation periods. Commodity hedge funds do not provide a better hedge in periods of high inflation but they do not bear any cost in low inflation periods. <b>TOPICS:</b>Real assets/alternative investments/private equity, commodities, futures and forward contracts, risk management

Currency Substitution in the Economies of Central Asia: How Much Does it Cost?

Underdeveloped financial markets and periods of high inflation have stimulated dollarization and currency substitution in the economies of Central Asia. Some authors argue that the latter can pose serious obstacles for the effective conduct of monetary policy and can affect households’ welfare. This study uses a model with money-in-the-utility function to estimate the elasticity of substitution between domestic and foreign currencies in three economies of Central Asia - Kazakhstan, the Kyrgyz Republic and Tajikistan. Utility derived from holding money balances is represented by a CES function with money holdings denominated in two currencies. The residents are assumed to diversify their monetary holdings due to instability of the domestic currency. The steady state analysis reveals that though currency substitution decreases governments’ seigniorage revenue, holding foreign money can be welfare generating if domestic currency depreciates vis-a-vis the currencies in which households’ foreign balances holdings are denominated. De-dollarization can only be achieved through further macroeconomic stabilization that will bring price and exchange rate stability. Financial sector development will also decrease currency substitution through the provision of reliable financial instruments and the gaining of public confidence.

Reconsidering the Relationship between Inflation and Relative Price Variability

It has long been popularly believed that the relationship between inflation and relative price variability (RPV) is positive and stable. Using disaggregated CPI data for the United States and Japan, however, this study finds that the relationship is neither linear nor stable over time. The overall relationship is approximately U‐shaped around a nonzero threshold inflation rate. RPV therefore changes not with the inflation rate per se, but with the deviation of inflation from the threshold inflation rate. More importantly, the relationship is by no means stable over time but instead varies significantly in a way that coincides with regime changes of inflation or monetary policy. The relationship was positive during the period of high inflation of the 1970s and the early 1980s, as has been documented by a number of previous studies, whereas it takes a U‐shape profile during the Great Moderation. The results are robust to the use of core inflation, which excludes the traditionally volatile prices of food and energy. This paper then presents a modified version of the Calvo‐type sticky price model to describe the observed empirical regularities. Simulation experiments show that the modified Calvo model fits the data well, and that the underlying relationship hinges upon the degree of price rigidity, which is systematically related to inflation regime. For countries and periods with low inflation rates, the relationship takes a U‐shape as price adjustment is more sticky. In a high‐inflation environment, when price setting becomes more flexible, the U‐shaped profile vanishes.

High Versus Low Inflation: Implications on Price-Level Convergence

This paper investigates the relationship between the level of inflation and regional price-level convergence utilizing micro-level price data from Turkey during two clearly distinguishable periods of high and low inflation. The results indicate that higher persistence and slower convergence of price levels are evident during the low-inflation period, which corresponds to the inflation-targeting (IT) regime that was successful in lowering and maintaining inflation at acceptable levels. During this low-inflation IT regime, it is also shown that inflation convergence across regions appears to occur more quickly and may be responsible for the slower pace of convergence in price levels.