High Inflation Regime Research Articles

Trust the experts? The performance of inflation expectations, 1960–2023

Using the oldest continuous surveys of U.S. inflation expectations, I find that when inflation is low, the average professional forecaster is generally rational (unbiased, with serially uncorrelated errors) and efficient (exploits available information), and inflation moves one-for-one with their expectations, whereas the average consumer is biased, underreacts to inflation, and inflation moves independently of their expectations. In contrast, when inflation is high the average consumer is generally unbiased, rational, and efficient, and inflation moves one-for-one with their expectations, while the opposite is true of professionals. Neither the median consumer nor median professional is fully rational and efficient, with the consumer underreacting when inflation is low and overreacting when inflation is high. However, inflation moves one-for-one with the median consumer forecast when inflation is high. Results are consistent with an inflation process characterized by two regimes—a low-inflation regime in which consumers are inattentive, and a high-inflation regime in which consumers are highly attentive and inflation moves with their expectations.11The numerical results presented in the manuscript were reproduced by CASCaD on the 19th of September 2024.

Distributive Conflict, High Inflation, and Stabilization Programs in a Small Open Economy Framework: The Case of Argentina in the 1980s

ABSTRACT The debates between demand-pull and cost-push theories of inflation have shaped stabilization programs since the 1923 German hyperinflation. This article combines elements from the modern revival of the Classical tradition of value and distribution and the Latin American Structuralist Approach to analyse the political economy behind Argentina's high-inflation regime and stabilization policies from 1983 to 1989. Our main hypothesis is that exchange rate dynamics play a crucial role in stabilizing distributive configurations and price dynamics in a small open economy with conflicting claims. High external debt, persistent devaluation expectations, and exchange rate policies imposed by international creditors to safeguard the economy's repayment capacity are identified as the primary causes behind the failure of stabilization attempts in Argentina during the late 1980s.

Interconnectedness in the FOREX market during the high inflation regime: A network analysis

Our study employs network analysis to examine the interconnectedness in the Foreign Exchange market, focusing on 18 key currencies from both advanced and emerging markets from 2017 to 2023. This analysis includes a comparative look at the impact of two major recent crises: the COVID–19 pandemic and the Russia-Ukraine war. The latter is notably marked by increased inflation and uncertainty in economic policies. During the COVID–19 pandemic, we observed a significant level of interconnectedness among the EURO and 17 other currencies, indicating a dense network. In contrast, the period of the Russia-Ukraine war revealed a tendency for countries less engaged in international trade to become more isolated, as seen by their greater distance from the network's centroid. Additionally, we developed the Systemic Contagion Index, which shows a heightened susceptibility to contagion among developed economies during both the COVID–19 and Russia-Ukraine war crises, underscoring the vulnerability of developed countries' currency networks in times of turmoil. This study provides valuable insights for investors and global businesses, offering guidance on assessing currency vulnerability and enhancing their strategies for hedging and managing risks amidst fluctuating market conditions, especially during the high inflation regime.

Neural network approach to portfolio optimization with leverage constraints: a case study on high inflation investment

Motivated by the current global high inflation scenario, we aim to discover a dynamic multi-period allocation strategy to optimally outperform a passive benchmark while adhering to a bounded leverage limit. We formulate an optimal control problem to outperform a benchmark portfolio throughout the investment horizon. To obtain strategies under the bounded leverage constraint among other realistic constraints, we propose a novel leverage-feasible neural network (LFNN) to represent the control, which converts the original constrained optimization problem into an unconstrained optimization problem that is computationally feasible with gradient descent, without dynamic programming. We establish mathematically that the LFNN approximation can yield a solution that is arbitrarily close to the solution of the original optimal control problem with bounded leverage. We further validate the performance of the LFNN empirically by deriving a closed-form solution under jump-diffusion asset price models and show that a shallow LFNN model achieves comparable results on synthetic data. In the case study, we apply the LFNN approach to a four-asset investment scenario with bootstrap-resampled asset returns from the filtered high inflation regimes. The LFNN strategy is shown to consistently outperform the passive benchmark strategy by about 200 bps (median annualized return), with a greater than 90% probability of outperforming the benchmark at the end of the investment horizon.

Exploring Inflation Dynamics with the Phillips Curve in Türkiye: Evidence from the Markov Regime Switching Model

Unlike in many advanced and emerging market economies, inflation was already a problem for the Turkish economy before the COVID-19 pandemic. During the 1990s, Türkiye experienced severe inflation, which reached three digits in some months. Although inflation was reduced to single digits in the 2000s through a successful disinflation program under an implicit inflation targeting framework with a flexible exchange rate regime, price stability became a problem again after the global financial crisis. Inflation gradually increased during the 2010s and became out of control after late 2021. This study aims to explore inflation dynamics in Türkiye using the Phillips curve framework for different inflation environments. To this end, the Phillips curve equation, augmented with the exchange rate and oil prices, is estimated using the Markov regime switching model between January 2006 and September 2023. Two regimes are identified in the sample, namely low- and high-inflation regimes. According to the estimation results, the Phillips curve is invalid in both regimes. The unemployment gap is statistically insignificant despite its negative impact on current inflation. The increasing coefficient of backward inflation in the high regime reflects the resurgent indexation behavior, which was dominant before inflation targeting was introduced in Türkiye. The positive impact of oil prices is only statistically significant in the low regime. While an increase in the exchange rate significantly raises inflation in both regimes, the effect is greater in the high-inflation regime. These empirical findings indicate that the primary issues for controlling inflation in Türkiye are inflation inertia and exchange rate stability.

Inflation regimes and hyperinflation: a Post-Keynesian/structuralist typology

Abstract The article proposes a typology of inflation regimes based on the Post-Keynesian and structuralist literature. We identify three separate regimes: the low, moderate and high inflation regimes. Hyperinflation is also defined and described. Each regime presents different characteristics. We identify the key role played by the distributive conflict between workers and capitalists in all the regimes, the role played by the indexation of wages on domestic prices in the moderate and high inflation regimes and the specific roles played by the widespread indexation on a short-term basis in the high inflation regime. Hyperinflation is explained by self-fulfilling prophecies about exchange rate variations and by the rejection of the domestic currency.

Inflation-Economic Growth Nexus in Nigeria: New Evidence on Threshold Effects

Purpose: The aim of this study is to analyze the influence of inflation on the economic growth of Nigeria from 1990 to 2021. Specifically, it aims to identify a threshold, if it exists, at which the impact of inflation on economic growth begins to shift.
 Methodology: To assess the inflation threshold and its impact on economic growth, this study employed a novel method, the endogenous sample-splitting and threshold model developed by Hansen (2000).
 Findings: The study reveals a non-linear relationship between inflation and economic growth in Nigeria, with a single inflation threshold of 12.88%. When inflation is below this threshold, it positively impacts economic growth, while exceeding it negatively impacts economic growth. Furthermore, higher trade openness negatively affects economic growth, and population growth positively impacts growth across all inflation regimes. Investments contribute to economic growth in the linear model, but their influence is statistically insignificant across the threshold regimes. Financial deepening impedes growth above the inflation threshold.
 Unique Contribution to Theory, Practice and Policy: The study expands upon the current body of research on estimating the inflation threshold for Nigeria using the Hansen (2000) sample splitting technique. To our knowledge, this is the first study that has adopted this technique to estimate inflation threshold for Nigeria. The Hansen (2000) threshold technique offers more flexibility in model specification. It allows for the estimation of parameters separately for different regimes, typically above and below the threshold. This flexibility can help in identifying distinct regimes, such as low and high inflation regimes, and capturing their unique characteristics. The research findings are crucial for shaping monetary policy in Nigeria, providing policymakers with valuable insights for establishing an inflation target that is in line with Nigeria's overarching goal of attaining sustained economic growth.

Exchange rate and housing affordability in OECD countries

Purpose This study aims to construct alternative models to establish the dynamic relationship between exchange rates and housing affordability by estimating both the short- and long-run relationship between exchange rates and housing affordability for 18 OECD countries from 1975Q1 to 2022Q4. After that, this study demonstrates how this nexus behaves during high and low inflation regimes and turbulent times. Design/methodology/approach This study uses the panel autoregressive distributed lag technique to examine the nexus between housing affordability to capture the distinct characteristics of the sample countries and estimate various short- and long-run dynamics in the relationship between housing affordability and exchange rate. Findings Exchange rate appreciation improves housing affordability in the short run, whereas this connection tends to dissipate in the long run. Moreover, inflation can worsen housing affordability during turbulent times, such as the global financial crisis, in both the short and long run. Ignoring these changes in the relationship between exchange rates and housing affordability during turbulent times can lead to incorrect conclusions. Originality/value To the best of the authors’ knowledge, this study is the first to examine the association between exchange rates and housing affordability by demonstrating how these variables behave in high and low inflation regimes and turbulent times.

Households’ Probabilistic Inflation Expectations in High-Inflation Regimes

Households’ Probabilistic Inflation Expectations in High-Inflation Regimes

Nexus between inflation and inflation expectations at the zero lower bound: A tiger by the tail

Ultra-low policy rates and zero lower bounds (ZLB) have been major issues for monetary policy formulation. In this context, we investigate the nexus between inflation and inflation expectations. Employing a non-linear ADRL framework on UK and Canadian datasets, we find significant asymmetries in the nexus among inflation and inflation expectations and their determinants, including labour market slack, output gap, oil shocks, fiscal deficit and exchange rates. Heterogeneities are explicit in the short and long-term as well as in the pre-and post-ZLB regimes. Inflation and inflation expectations become more responsive to their determinants as key policy rates approach the ZLB. There is strong evidence of persistence in inflation and inflation expectations in both regimes manifesting the importance of keeping expectations well anchored. Robustness testing with Time-Varying Parameter Vector Auto-Regression and Network Analysis confirms our findings. To mitigate the persistence of a high inflation regime, it would be vital to keep the inflation expectations well anchored.

Возврат мировой экономики к режиму высокой инфляции

Global inflation is one of the most significant challenges for the post-pandemic world economy. After several decades of low inflation and even elements of deflationary processes in developed countries, the danger of falling into a new period of great inflation had seemed insignificant. Dovish monetary policy during the 2009–19 period did not provoke a spike in inflation, and the slowdown of the economy during the lockdown period put the vigilance to rest. However, the COVID-19 pandemic and anti-crisis measures it triggered, the Russia-Ukraine conflict, and sanctions and anti-sanctions solidified inflationary processes around the world, both in developed and developing countries. In this article, we show the inertial nature of inflation in both the U.S. and the European Union (EU) and argue that there has been a transition to a high inflation regime, despite the decline in developed country inflation in the first quarter of 2023 mentioned in the International Monetary Fund’s (IMF) January report. Getting out of this high inflation regime will require much more serious and time-consuming measures than those used to manage inflation in the low inflation regime.

Asymmetric persistence in Turkish interest and inflation rates: New evidence from quantile unit root test with structural shifts

AbstractThis study investigates the persistence in Turkish interest and inflation rates since the implementation of inflation‐targeting monetary policy, covering the period from January 2006 to July 2022. We focus on accounting for asymmetric persistence by benefiting from recent developments in quantile unit root analysis. The findings indicate that while the conventional unit root tests support the persistence of shocks to interest rates and inflation, the quantile unit root test demonstrates an asymmetric behaviour of the persistence, implying a time‐varying structure with mean reversion (persistency) of the shocks in low (high) inflation periods. Furthermore, the half‐lives increase with the positive shocks, indicating a longer speed of adjustment in the high inflation regime. These findings provide new insights into the relationship between interest rates and inflation and have sound policy implications.

Investing in Deflation, Inflation, and Stagflation Regimes

We examine asset class and factor premiums across inflationary regimes. As periods of deflation, high inflation, and especially stagflation are relatively uncommon in recent history, we use a deep sample starting in 1875. Moderate inflation scenarios provide the highest returns across asset class and factor premiums. During deflationary periods, nominal returns are low, but real returns are attractive. By contrast, real equity and bond returns are negative during a high inflation regime and especially so during times of stagflation. During these “bad times,” factor premiums are positive, which helps to offset part of the real capital losses.

Exchange rate pass-through to inflation in South Africa: is there non-linearity?

PurposeThis paper aims to examine the asymmetric effects of exchange rate shocks on inflation for a small open economy, namely South Africa, over the period 1970Q1–2020Q1.Design/methodology/approachA threshold vector autoregressive model that allows parameters to switch according to whether a threshold variable crosses an estimated threshold is employed to address the objective of this paper. The threshold value is determined endogenously using the Hansen (1996) test. Generalized impulse responses introduced by Koop et al. (1996) are used to study the effects of exchange rate shocks on inflation depending on their size, sign and timing to the inflation cycle. The authors also employed a Cholesky decomposition identification scheme to identify exchange rate shocks in the non-linear model.FindingsThe results show that there is a non-linearity effect of the exchange rate shock on inflation. In particular, the effects of 1 or 2 standard deviations of positive (appreciation) or negative (depreciation) exchange rate shock on inflation are small in the long run but a bit larger in the high inflation regime than the low inflation regime.Originality/valueThis paper contributes to the literature on the non-linear effects of exchange rate pass-through (ERPT) to inflation for Sub-Saharan African economies in general and the South African economy in particular by incorporating the size and timing of the exchange rate shocks to the inflation cycle.

Financial intermediaries and speculation in the foreign exchange market: the role of monetary policy in Iran’s economy

Given the high fluctuations of the general price level, the importance of investment, and accessing sufficient financial resources, we examine the effects of monetary policy on the nominal (Inflation) and real (Investment) sectors of a developing economy, like Iran, through the channel of the relationship between bank deposits, stock market, and speculation in the foreign exchange market (FEM). For this purpose, due to regime switching in Iran’s economy, the non-linear relation between the variables has been investigated by applying Markov switching models and annual data of 1988–2018. The results show that the financial intermediaries (FIs) have not had a complementary relationship in both bear and bull market and high and low banks deposits regimes. Both FIs have negatively impacted speculation in the FEM in high and low exchange rates difference regimes. The difference between official and unofficial exchange rates negatively impacted the FIs in bear market and low banks deposits regimes; on the contrary, a positive effect in a bull market and high bank deposits. The effects of both FIs on investment have been positive in high and low investment regimes and negative on inflation rates in high and very high inflation regimes. In comparison, the impact of speculation in the FEM has been negative on investment and positive on inflation. Therefore, in the event of the lack of limitations regarding using interest rate (IR) and the policy of exchange rate unification, the central bank would be able to affect the nominal and real sectors of the economy suitably through the channels of the FIs and the FEM.

Low Inflation Bends the Phillips Curve around the World

This paper finds strong support for a Phillips curve that becomes nonlinear when inflation is “low”—which our baseline model defines as less than 3 percent. The nonlinear curve is steep when output is above potential (slack is negative) but flat when output is below potential (slack is positive) so that further increases in economic slack have little effect on inflation. This finding is consistent with evidence of downward nominal wage and price rigidity. When inflation is high, the Phillips curve is linear and relatively steep. These results are robust to placing the threshold between the high and low inflation regimes at 2, 3, or 4 percent inflation or for a threshold based on country-specific medians of inflation. In this nonlinear model, international factors play a large role in explaining headline inflation (albeit less so for core inflation), a role that has been increasing since the global financial crisis. These results provide evidence of channels which could boost inflation in the future, even if they were dormant before the Covid pandemic.

Is policy causing chaos in the United Kingdom?

We study the stability properties and conditions for the onset of Shilnikov chaos in the UK New Keynesian macroeconomy, as well as the shifts in equilibrium dynamics under various policy regimes. Shilnikov chaos emerges for a restricted part of the free parameter space in the baseline rational expectations UK model with no regime switching. Chaos did not occur, when the UK's central bank showed a weak response to inflation in the high-inflation regime, while it appears easily in the low-inflation regime associated with the central bank's use of aggressive monetary policy in recent years. As a policy alternative for restoring uniqueness, the local analysis proposes tightening the monetary policy rule via the Taylor coefficient along with passive fiscal policy. But we find that doing so could hasten the emergence of Shilnikov's chaotic dynamics. The magnitude of the Taylor coefficient thus becomes central in attaining the desired long run steady-state.

The nexus between tourism and regional real growth: dynamic panel threshold testing

This study analyzes the nexus between tourism and regional real growth for European regions at the Nomenclature of territorial units for statistics (NUTS), level 2, for the period 1995-2019. The study uses the dynamic panel threshold model to analyze complex relations between variables. As the dependent variable, we chose real growth rate of regional gross value added at basic prices by NUTS 2 regions. The independent variable is regional arrivals at tourist accommodation, while the control variables are health, household income, and employment at NUTS 2 regional level. The study found the threshold variable for 95% confidence interval. The marginal effects in the low inflation regime are higher compared to marginal effects in the high inflation regime. The study results support tourism-led growth hypothesis, indicating tourism as a one of the main drivers of regional growth. This research contributes to rare literature in application of dynamic panel threshold model in tourism. As an implication, this study can be used as a methodological approach to analyze the impact of different variables (not only tourism, but also innovations, technology, well-being, etc.) on regional growth, especially in countries with high regional differences, such as the Commonwealth of Independent States (CIS), Latin America, etc.

Non-Linearities, State-Dependent Prices and the Transmission Mechanism of Monetary Policy

AbstractA sticky price theory of the transmission mechanism of monetary policy shocks based on state-dependent pricing yields two testable implications that do not hold in time-dependent models. First, large monetary policy shocks should yield proportionally larger initial responses of the price level. Second, in a high trend inflation regime, the response of the price level to monetary policy shocks should be larger and real effects smaller. Our analysis provides evidence supporting these non-linear effects in the response of the price level in aggregate US data, indicating state-dependent pricing as an important feature of the transmission mechanism of monetary policy.

A Markov-Switching Model of Inflation in Bolivia

The Bolivian inflation process is analyzed utilizing a time-varying univariate and multivariate Markov-switching model (TMS). With monthly data and, beginning in the late 1930s, inflation is accurately described by a univariate TMS. The intercept for the high-inflation regime is significantly higher than for the low-inflation regime and the actual inflation rate mirrors the smoothing probabilities of the Markov process. Additionally, the predicted duration of each regime closely fits the periods when the country experienced low and inordinate high inflation rates. From a long-run perspective and utilizing a multivariate TMS, the results generally fall in line with what the quantity theory of money predicts. In the high-inflation regime, money growth increases inflation (almost) one-for-one, as classical economics contends. From a short-run perspective and in the high-inflation regime, inflation is almost exclusively explained by a negative output gap. In the low-inflation regime, lagged inflation is the most important determinant of inflation, in line with price stickiness expectations. Partitioning the sources of inflation demonstrate that, from a long-run perspective and in the high inflation regime, differences in inflation are mostly explained by GDP growth; in the low-inflation regime, money growth and velocity growth are the principal factors explaining the variance of inflation. From a short-run perspective, the output gap explains almost all regression variance in the high-inflation regime, and past inflation does the same during times of low inflation, though in both cases the R2 is low which precludes making definite statements about the sources of variability in inflation.