Higher Inflation Expectations Research Articles

Inflation expectations and the stock-bond nexus in the US: hedging implications

This paper first examines the impact of inflation expectations on the correlation and tail-dependence between stock and Treasury (corporate) bond markets in the US and then assesses the portfolio and hedging implications. Using dynamic C-vine copula models, the results show in several cases a shift in the stock-bond nexus after conditioning on the levels of inflation expectations. The average dynamic tail-dependence between stocks and 10- and 30-year Treasury bonds becomes positive in the post-Covid era. High inflation expectations intensify the average tail-dependence between stocks and mid-term corporate bonds since the Covid-19 outbreak, and between stock and Treasury bonds from early 2020 to the beginning of the conflict between Russia and Ukraine. A hedging analysis shows that the hedging effectiveness improves after taking into account the impact of inflation expectations on stock-bond nexus, especially in the post-Covid-19 subperiod. This hedging effectiveness sustains after changing the proxy of inflation expectations.

Bitcoin: a Ponzi scheme or an emerging inflation-fighting asset?

Under the dual impact of the COVID-19 pandemic and the Russian-Ukrainian conflict, the excessive stimulation of monetary policy continuously pushes up global inflation (INF). Therefore, this article explores whether Bitcoin can serve as a safe haven for INF. We apply the rolling-window Granger causality test to solve the issue of parameter instability in vector autoregression (VAR) systems and investigate the time-varying interaction between INF and Bitcoin price (BP). The negative influence of INF on BP means a high inflation shock causes BP to decline, indicating that Bitcoin cannot be a safe asset against INF. This is because investors have decreased their willingness to hold Bitcoin under the high INF expectations and cause BP to fall. This finding is not supported by the Intertemporal Capital Asset Pricing Model, emphasising that INF positively impacts BP. Conversely, BP has positive and negative impacts on INF. The positive effect highlights the effectiveness of Bitcoin in predicting INF fluctuations, but economic factors could undermine this effectiveness. In the context of economic stagnation and market turmoil, investors can adjust their portfolio investments based on Bitcoin. The government should utilise the trend of BP to regulate the dynamics of INF to reduce uncertainty in the financial system.

Shocks to inflation expectations

The consensus among central bankers is that higher inflation expectations can drive up actual inflation. We assess this by devising a novel method for identifying shocks to inflation expectations, estimating a semi-structural VAR where an expectation shock is identified as that which causes measured forecasts to diverge from the rational expectation. Surprisingly, using data for the United States we find that a positive inflation expectation shock is contractionary and deflationary: output, inflation, and interest rates all fall. These results are inconsistent with the standard New Keynesian model, which predicts inflation and interest rate hikes.

Trust in the central bank, financial literacy, and personal beliefs

This paper examines trust in the central bank across ten Central, Eastern and Southeastern European countries, using survey data collected from 61,398 individuals. Our results show that financially literate individuals are more likely to trust central banks. The association is stronger in countries with inflation targeting and flexible exchange rates regimes. Distrust in the central bank is associated with higher inflation expectations, savings in foreign currency or a preference for cash. Even when the sample is restricted to individuals with high inflation expectations, financial literacy remains associated with greater trust in the central bank. We find that trust in the central bank correlates negatively with financial inclusion but positively with wealth. Financially literate citizens express less trust in the government, which highlights that trust in the central bank is not entirely indicative of trust in the government. However, individuals who think that prices will rise and the local currency will depreciate distrust both the central bank and the government.

МОДИФИКАЦИЯ ДЕНЕЖНО-КРЕДИТНОЙ ПОЛИТИКИ В УСЛОВИЯХ АДАПТАЦИИ ЭКОНОМИКИ К НОВЫМ УСЛОВИЯМ

In the context of the geopolitical transformation of the modern economy, monetary policy is being modified, which is the basis of macroeconomic trends. The key rate remains the main instrument of monetary regulation, the manipulation of which makes it possible to overcome high inflation expectations. The measures of monetary policy should include measures to control the movement of capital. The requirement imposed by the Bank of Russia on the mandatory sale of foreign exchange earnings of exporters allowed to stabilize currency volatility. Measures to increase the stability of the banking sector are of great importance. Mandatory reserves have been optimized to increase the flexibility of banks in managing their own funds. In order to adapt to longer-term structural changes, credit institutions were provided with a large-scale package of temporary support measures. Among them is the possibility of fixing the exchange rate and the value of assets for calculating standards. Measures have been introduced to support borrowers, and preferential lending programs for borrowers have been adopted. Modern instruments of monetary policy are communications. With their help, the central bank influences the degree of confidence in the policy being pursued. Short-term measures were taken to support the restructuring of the Russian economy in the face of sanctions, such as reducing administrative pressure on business, simplifying customs and transport clearance procedures, product certification, and accelerating the introduction of digital technologies. Thus, monetary policy acquires new imperatives.

ANALYSIS OF THE FATE OF INDONESIA' S ECONOMY IN THE FUTURE

Court Developing countries tend to experience inflation, countries with inflation below 3% are still on the normal threshold for a country (stebisgm, 2015) but conversely a country with high and unstable inflation is a reflection of economic instability which results in a general and continuous increase in the level of prices for goods and services in a country and results in higher levels of poverty and unemployment. In this study we used a quantitative method using time series data from 2015 to 2021 and carried out statistical calculations using SPSS.. Results According to the study, the inflation rate is 3532 > 2306. The significance level is 0.039 <0.05, which means that inflation affects Indonesia's economic growth/gross domestic product (GDP). Even though the management of the state's economy cannot be separated from the state, including Indonesia from the countries affected by the state. However, the monetary and fiscal policies implemented in each country vary depending on economic conditions, direction and development goals to be achieved. The economic growth of a country, including Indonesia, is inseparable from the monetary and fiscal policies implemented by each country. However, monetary and fiscal policies differ from country to country Actual economic conditions, development trends and goals that can be achieved. An important function of financial management and financial management is to control inflation rates, cash flows and control additional costs in the company. The purpose of this study is to analyze the situation of the Indonesian economy for the next five years and to analyze the government's role in controlling inflation, monetary policy and fiscal policy and their impact on the economy. Macro - for economic analysis (Sutiono M.Kom., M.T.I, 2019) mi law near and far. The method used is a literature survey methodology and the data used is secondary data which is consistent with various relevant literature. To overcome inflation, monetary policy, and taxation, the government must implement performance-related macroeconomic policies. Measures of inflation and economic growth. Therefore, all countries must maintain economic stability is threatened. Inflation is one of the most important factors in the economy. The inflation rate is caused by many changes regarding major economic changes such as economic growth and unemployment. Thus, expansion is a variable that is often observed and tested both theoretically and empirically. Economic growth can only be successful if it is supported by sustainable growth, which then must improve people's welfare. Growth recovery refers to the rate at which growth returns to balance after a shock. In addition, this research examines sustainability factors in various regions in Indonesia. To measure the sustainability of inflation, this study uses the univariate autoregression (AR) model.. According to the results there are eight, namely:
 (1) provinces/cities in East Java experienced higher growth rates during the study period. The highest elevation is in the town of Probolingo and the lowest in the town of Madiun. The things that contribute the most to growth are made from staple foods like eggs, rice, chicken, tomatoes, beans and beef. and others
 (2) According to our findings, the increase in inflation in the eight provinces/districts of East Java was high enough to attract editorial attention. high inflation expectations also lead to persistent inflation. Based on this information, the government needs to formulate a strategy to control inflation that is sustainable and measurable, such as strengthening the role of groups. Regional Inflation Monitor (RPID). Unemployment and inflation are two important issues in any country. The difference between these two variables remains a subject of research among economists as evidenced by the Phillips curve theory.

The intertemporal substitution effect of energy consumption under climate policy changes

Based on the intertemporal substitution effect, the high inflation expectations can stimulate agents to consume now rather than in the future. However, under the background of global climate policy changes, how inflation expectations affect energy consumption? Using the bootstrap Granger full-sample causality test and sub-sample rolling window tests, this study examines the intertemporal substitution effect of energy consumption in the U.S. The results based on the full-sample data indicate no causality between inflation expectations and energy consumption, which suggests that the intertemporal substitution effect of energy consumption does not exist. Nevertheless, the rolling window method which estimates a time-varying causality identifies a short-lived positive effects of inflation expectations on energy consumption in a distinct sub-period before the global Paris agreement, but disappears since then. Therefore, the intertemporal substitution effect regarding energy consumption does not exist under the background of pressing carbon targets. The effects of energy consumption on inflation expectations can be positive or negative, which tells a cautionary tale about climate policies aiming at engineering lower carbon emissions.

Trend inflation and implications for the Phillips Curve

This Economic Commentary estimates trend PCE inflation and a Phillips curve with time-varying parameters while allowing for trend inflation to affect the frequency at which firms change prices. Since the beginning of 2021, trend PCE inflation has risen well above the FOMC’s 2 percent long-term inflation target, and the most recent estimate of trend inflation in 2022:Q4 is 3.4 percent. With the increase in trend inflation, the Phillips curve slope has risen above its pre-pandemic level. At the same time, the relationship between current inflation and inflation expectations has strengthened. Together, these results imply that even though a slowing economy would help to bring down inflation through the steeper slope of the Phillips curve, high short-term inflation expectations could put upward pressure on inflation to a larger extent than they had prior to the pandemic.

Determinants of Inflation Expectations in the Euro Area

Euro area inflation has been rising strongly in the wake of the COVID-19 pandemic, giving rise to concerns that there could be second-round effects, with higher inflation leading to higher inflation expectations, which in turn lead to higher inflation. This could result in more persistent rises in inflation.

2022: ECONOMIC TRENDS, ACTUALIZATION OF NATIONAL SECURITY FACTORS IN THE SYSTEM OF MACRO-LEVEL STRATEGIC PLANNING

The world economic trends of 2021, characterized by recovery growth, are characterized. At the same time, there are still risks of market imbalance, rising inflation, and widening income gaps between various social groups of the population. The pressure of economic sanctions on the Russian economy is increasing. A brief description of the Russian economic results of 2021 is given. The achieved growth of economic indicators was facilitated by the favorable conjuncture of world commodity prices. At the same time, high inflation expectations remain for the conditions of 2022. A decline in world commodity prices is forecast. At the government level in 2021, measures were taken to develop a set of strategic initiatives for the socio-economic development of the country until 2030. At the same time, the problems of improving the quality of public administration remain relevant. Recommendation on strengthening the role of the national security strategy planning are given. Proposals are formulated to improve the guality of strategic planning of socio-economic and territorial development at the federal level

Overconfidence of the chair of the Federal Reserve and market expectations: Evidence based on media coverage

AbstractThis paper examines the relationship between the overconfidence expressed by the chair of the US Federal Reserve and financial market expectations. I first use a media‐based proxy to compute a measure of Fed chair's overconfidence for the period 1999M01–2017M07, the overconfidence indicator. The overconfidence indicator provides a quantitative measure of the overconfidence expressed by the Fed chair, which is covered by the media, and thus, perceived by financial market participants. I relate this variable to inflation and unemployment expectations of market participants. Our results show that an overconfident Fed chair is significantly associated with higher inflation expectations and lower unemployment expectations. These findings are robust to (i) the macroeconomic forecasts used to extract the exogenous component of the media‐based proxy reflecting Fed chair's overconfidence (the Survey of Professional Forecasters and the Greenbook forecasts) and (iii) an alternative proxy of inflation expectations. These findings shed some new light on the impact of central bankers' communication on financial market expectations, and thus, on the effectiveness of their monetary policy decisions.

DETERMINANTS OF INFLATION IN INDIA IN A DYNAMIC SETUP

The present study empirically examines the factors accounting for inflation in India in an open economy framework by utilizing the bounds testing approach to cointegration for the 2006: Q3-2019: Q4 period. The findings reveal the existence of a long-run relationship with the household survey-based inflation expectation, real output, narrow money aggregate and interest rate as important determinants of inflation. The study concludes that inflation is well explained by a combination of structural and monetary factors. Notably, the significance of inflation expectation as an important explanatory variable corroborates the utilization of inflation forecast by the RBI as an intermediate target in the flexible inflation targeting framework. In this backdrop, it is imperative for RBI to conduct a high frequency inflation expectations survey of households to account for frequent information updation on the part of certain groups of households.

Unconventional monetary policy and inflation expectations in the Euro area

With the nominal short-term interest rates approaching the zero-lower bound, the ECB adopted a range of unconventional monetary policies (UMP) to push inflation back to its target, but inflation has remained far below two percentage points. While conventional monetary policy tools are ineffective, inflation expectations become a key channel for the transmission of monetary policy. Nevertheless, there is still no clear consensus about the effectiveness of UMP on inflation expectations. By constructing a novel measure for UMP, our study examines the effects of the ECB's UMP on inflation expectations in the Euro area during 2009–2018. We find that an unanticipated UMP shock raises inflation expectations in the short-term. However, as higher inflation expectations do not boost GDP nor realized inflation, they decrease after a few months, which suggests that the expectation channel is not fully functioning even if the ECB manages to stabilize inflation expectations temporarily.

Coronavirus Fears and Macroeconomic Expectations

The Federal Reserve cut interest rates by 50 basis points on March 3, 2020, in response to concerns about the coronavirus (COVID-19). On March 5 and 6, I conducted an online survey of over 500 U.S. consumers that asked about their attention to, concerns about, and responses to the coronavirus, their awareness of the Fed's policy move, and their inflation and unemployment expectations. I then provided respondents with information about the Fed's policy announcement, and re-elicited inflation and unemployment expectations. Most consumers were somewhat or very concerned about effects of coronavirus on the U.S. economy, their health, and their personal finances; 28% had cancelled or postponed travel and 40% purchased food or supplies in response to these concerns. About 38% were aware that the Fed had cut interest rates. I show how concerns and awareness of the rate cut depend on consumer characteristics and news sources. Greater concern about coronavirus is associated with higher inflation expectations and more pessimistic unemployment expectations. Provision of information about the Fed announcement leads some consumers to become more optimistic about unemployment and revise inflation expectations downward, consistent with recent research showing that many consumers associate bad times with high inflation.

Coronavirus Fears and Macroeconomic Expectations

The Federal Reserve cut interest rates on March 3, 2020, in response to COVID-19. On March 5 and 6, I surveyed over 500 consumers about their concerns about COVID-19, awareness of the Fed's announcement, and macroeconomic expectations. Most consumers were concerned about effects of COVID-19 on the economy, their health, and their personal finances. About 38% were aware that the Fed had cut interest rates. Greater concern is associated with higher inflation expectations and more pessimistic unemployment expectations. I informed respondents about the Fed's announcement, which led some consumers to become more optimistic about unemployment and revise inflation expectations downward.

Inflation Expectations and Firm Decisions: New Causal Evidence*

Abstract We use a unique design feature of a survey of Italian firms to study the causal effect of inflation expectations on firms’ economic decisions. In the survey, a randomly chosen subset of firms is repeatedly treated with information about recent inflation whereas other firms are not. This information treatment generates exogenous variation in inflation expectations. We find that higher inflation expectations on the part of firms leads them to raise their prices, increase demand for credit, and reduce their employment and capital. However, when policy rates are constrained by the effective lower bound, demand effects are stronger, leading firms to raise their prices more and no longer reduce their employment.

An analysis of heterogeneity in inflation expectations across cities in India

PurposeThe Inflation Expectations Survey of Households, conducted by the Reserve Bank of India (RBI), indicates that there is considerable disparity in inflation expectations across cities in India. The purpose of this paper is to investigate why different cities exhibit heterogeneous inflation expectations despite coming under a central monetary policy umbrella.Design/methodology/approachFirst, the correspondence between city-level inflation expectations and city-specific economic characteristics is mapped. Second, how the disagreement in inflation expectations across cities, measured by dispersion, behaves over the business cycle is investigated. Finally, using seemingly unrelated regression technique, the economic factors that play a role in explaining inflation expectations heterogeneity across cities are estimated.FindingsCities with higher economic activity and cost of living have higher inflation expectations. Disagreement across cities regarding inflation expectations rise with an increase in output gap and inflation. Information friction plays an important role in explaining the disparity in inflation expectations across cities, and the effects of macro-level factors vary across cities, thereby accentuating expectations dispersion.Research limitations/implicationsMonetary policy-related communication by the RBI (toward the general public) should increase in order to address information friction, which, in turn, would temper down the extent of inflation expectations heterogeneity across cities in India.Originality/valueThis is a novel application of the data from the monetary policy perspective. Heterogeneity in inflation expectations across cities or regions is an unexplored area. The use of nightlights as a proxy for city-level economic activity in India (in absence of data on city-level income) is another original contribution.

Expectation formation in a new environment: Evidence from the German reunification

Exploiting the German reunification, we study how households adapt to a new environment in their macroeconomic forecasting. East Germans expect higher inflation than West Germans decades after reunification. These differences are likely driven by the persistent effect of the inflation shock after reunification, which contrasted strongly with experiences of zero inflation in the GDR. East Germans’ higher inflation expectations are reflected in higher consumer debt and lower bond holdings. Our findings suggest that large changes in the environment can permanently impede people’s ability to form expectations, with an important role for the interaction of experiences before and after the event.

Institutional Change and Macroeconomic Expectations: Evidence from the German Reunification

Exploiting the German reunification, we study how households adapt to a new environment in their macroeconomic forecasting. East Germans expect higher inflation than West Germans decades after reunification. These differences are likely driven by the persistent effect of the inflation shock after reunification, which contrasted strongly with experiences of zero inflation in the GDR. East Germans' higher inflation expectations are reflected in higher consumer debt and lower bond holdings. Our findings suggest that large changes in the environment can permanently impede people's ability to form expectations, with an important role for the interaction of experiences before and after the event.

Inflation Expectations and Firms’ Decisions: New Causal Evidence

We use a unique design feature of a survey of Italian firms to study the causal effect of inflation expectations on firms' economic decisions. In the survey, a randomly chosen subset of firms is repeatedly treated with information about recent inflation (or the European Central Bank's inflation target) whereas other firms are not. This information treatment generates exogenous variation in inflation expectations. We find that higher inflation expectations on the part of firms leads them to raise their prices, increase their utilization of credit, and reduce their employment. However, when policy rates are constrained by the effective lower bound, demand effects are stronger, leading firms to raise their prices more and no longer reduce their employment.