Inflation Differentials Research Articles

Expectations of Exchange Rates and Differential Inflation Rates: Further Evidence on Purchasing Power Parity in Efficient Markets

ABSTRACTThe paper tests the null hypothesis of ex ante purchasing power parity. The empirical evidence obtained is inconsistent with the null for major industrialized countries over the current floating exchange rate regime. Expected nominal exchange rate changes appear to deviate systematically from expected inflation rate differentials over the same holding period even though real exchange rate changes appear to be serially uncorrelated. This supports the presence of time‐varying risk premia in foreign exchange markets and real determinants of exchange rate movements as suggested by equilibrium theories of international asset markets.

Expectations of Exchange Rates and Differential Inflation Rates: Further Evidence on Purchasing Power Parity in Efficient Markets

The paper tests the null hypothesis of ex ante purchasing power parity. The empirical evidence obtained is inconsistent with the null for major industrialized countries over the current floating exchange rate regime. Expected nominal exchange rate changes appear to deviate systematically from expected inflation rate differentials over the same holding period even though real exchange rate changes appear to be serially uncorrelated. This supports the presence of time-varying risk premia in foreign exchange markets and real determinants of exchange rate movements as suggested by equilibrium theories of international asset markets.

The economics of prevention: A critique

A recent claim that “few preventive programmes, if any, reduce medical expenditures” is critically reviewed with specific reference to the health value of regular exercise. It is argued that a focus upon medical expenditures biasses the argument in favour of acute care by neglecting much of the investment in research, training and construction, and ignoring differences in the quality of life between fit and marginally healthy individuals. By focussing on a specific clinical condition, the widespread benefits of exercise are also overlooked, and by equating costs with the consumer price index, errors from differential inflation are ignored. Discounting of benefits weighs heavily against prevention, but is an inappropriate tactic in a steady-state situation. Likewise, the levying of incidental medical charges for an extended lifes-pan is inappropriate when the individual concerned is also contributing to society. Limited recruitment and poor adherence are the main current weaknesses of preventive medicine, but their impact should be reduced when a preventive philosophy becomes the norm for both the patient and his or her medical adviser. The collection of appropriate and unbiassed estimates of costs and benefits is an important first step towards this objective.

The Policy Implications of Internationally Mobile Capital under Fixed Exchange Rates

It is a well known prediction of the monetary approach to the balance of payments that a small country with a fixed exchange rate is precluded from pursuing an independent monetary policy. In the long run, it must inflate at the same rate as the rest of the world. Parkin (1974) demonstrated, however, that some degree of monetary independence is possible in the short run. Thus, if countries expand the domestic component of their money supplies at different rates, the existence of inflation differentials can be explained. The model used to derive this result was limited to the current account of the balance of payments. Moreover, there being no bond market, the only policy option available was a fiat money increase. It is the purpose of this paper to extend the Parkin model to incorporate the capital account of the balance of payments and to analyse the policy implications of internationally mobile portfolio capital for a small country faced by an increase in the world money supply. By re-specifying the model, it is also possible to widen the menu of policy options to include the sterilization of capital inflow to meet an interest rate target, targets for domestic credit expansion and complete capital controls. The dynamic stability properties of the model's response to an inflationary increase in the world money supply are examined. It is demonstrated that the long-run results of the monetary approach hold true provided capital is effectively immobile. If not, the model permits no stable solution. Its short-run properties are essentially similar to those obtained by Parkin.

A Dynamic Replacement Economy Decision Model

Abstract A generalization of Wagner's dynamic programming model for the replacement economy decision problem is presented. The model, illustrated by numerical examples, classifies relevant cash flows into three components: capital transfers, operating disbursements, and operating revenues. Conceptually, this model could be extended easily to an arbitrary number of component cash flows. Multiple alternative challengers to a current defender are considered, and each component cash flow of each challenger can vary independently according to the time of acquisition; thus differential inflation and prospective technological changes could be dealt with easily. A PASCAL implementation of the model, included as an appendix, was used to identify prospectively optimal sequences of assets in three numerical examples.

A Hicksian Model of Labour Turnover and Local Wage Determination

Employers have a variety of reasons for attempting to stabilize turnover in their labour force. For example, specific skill requirements, the added costs of training inherent in hiring new workers, and the absolute demand for labour may stimulate firms to minimize labour turnover. One way of reducing turnover is for the individual firm to raise its wage rates. However, depending upon the relative tightness of the local labour market (reflected in the rates of hiring and unemployment), this could result in widespread wage competition amongst employers and general increases in the aggregate local wage rate. The significance of quits, hires, and unemployment are explored, in an attempt to explain differential urban wage inflation in the United States. Emphasis is placed on Hicks's model of labour turnover which emphasizes the firm's management of its labour needs. This model is analysed in a time-series framework over the period 1970–1979; a decade of rapid inflation and general stagnation in the United States.

International Portfolio Capital Flows and Real Rates of Interest

T HE international monetary events of the 1970s-the collapse of Bretton Woods, the introduction of generalized floating exchange rates, the appearance of significant inflation differentials among the major industrialized nations (e.g., Goldstein and Young, 1979), and the recent threat of rate wars -have renewed interest among international economists in the role real rates of return play in determining the international pattern of capital flows (Mudd, 1979) and exchange rates (Frankel, 1979). In this paper I investigate the empirical relationship between long-term portfolio capital flows and the real rate of interest for three European countries and the United States. The flows are disaggregated according to asset and liability categories and are measured on a quarterly basis; I examine only long-term portfolio flows into and out of the private sectors of the United Kingdom, West Germany, Italy, and the United States. The methodology represents an extension and mathematical redefinition of the stockadjustment approach to capital flow modeling developed by Branson (1968) and applied by Miller and Whitman (1970) to analyze long-term foreign portfolio investment. Real rates of interest are explicitly calculated through the computation of (weakly) rational expected inflation variables (Kreicher, 1979), which are then composed with long-term nominal rates in a manner consistent with a long-run, relative Purchasing-Power Parity theory of exchange rate expectations. The results reported here support the stockadjustment approach and provide fairly convincing evidence in support of the hypothesis that international investment decisions are sensitive and responsive to inflationary and exchange rate expectations and real interest rates.

The european monetary system — Will it really bring more monetary stability to Europe?

A description is given of the aims, design, and policy requirements of the EMS, and of the sort of exchange rate instability it is supposed to end. Changes in market exchange rates are attributed to differential inflation rates between countries and real exchange rate movements. Stable exchange rates can be obtained only if monetary policy is, managed so as to produce international differences in inflation rates that exactly compensate for movements in real exchange rates. Past monetary policies were seriously inconsistent with this requirement. And as yet nothing indicates that they will improve in the future. Moreover, real exchange rate changes are neither well-understood nor well-predictable. As a result, the prospects for the EMS to create monetary stability are dim. It will produce neither price nor exchange rate stability. A better alternative is proposed. Countries should combine flexible exchange rates with low, stable, and equalized inflation rates across the EC and dismatle capital and exchange controls.

General discussion

P. T. Landsberg ( University of Southampton). I should like to draw attention to the importance of inflation in estimating the economic viability of solar collectors. Figure 1 is due to D. J. Toop of B.S.I. and myself (I. E. E. 1979). Plotted vertically is the maximum cost of collectors in £/m 2 for economic viability. The future rate of inflation of fuel prices, is plotted horizontally. The curves rise since fuel price inflation allows one to spend more on the installation without being out of pocket (other things being equal). The money saved, however, loses its purchasing power owing to general inflation, i g , and this has to be taken into account. The higher this is, the more the curves are depressed, and the graph therefore illustrates the effects of differential inflation. Energy is a commodity that will probably suffer rather high differential inflation, since more expensive energy resources have to be exploited as the cheaper ones are depleted.

Comment s'appauvrir en se développant: impôts et changement social chez les Rukuba (Nigéria Central)

ABSTRACTThis article examines the evolution of taxation among the Rukuba of Central Nigeria within a period of about seventy years, during which the means of earning cash to pay taxes changed drastically from the sale of indigenous agricultural produce for purely local consumption to mining work, which they dislike and in the past had been able to avoid. The reason for this change is the increasing taxation rate, indexed to the world inflation rate, to which the Rukuba are subjected. The increase of the inflation rate has been greater than the increase of the price of local food products, thus requiring the Rukuba to increase their grain sales tenfold in order to continue paying their taxes in this way. Since they wish to avoid completely depleting the granaries, on which they must draw for their own consumption as well, the Rukuba have had to look for other sources of income. It is this “differential inflation rate” between taxes and the price of local produce which has transformed the Rukuba from agricu...

Inflation and exchange rates: Evidence and policy guidelines for the European community

The paper, which is a summary of the so-called OPTICA-report, sponsored by the Commission of the European Communities, argues that changes in the exchange rates of EC member currencies during the period between the early 1960s and the mid-1970s predominantly reflect inflation differentials. The correspondence is sufficiently close, when wholesale price indices are used to express national inflation rates and PPP is measured in terms of effective exchange and inflation rates, to justify a PPP-based intervention rule as the main criterion for managing the individually or jointly floating EC-currencies.

A simple method for differential block-inflation in anesthesia for lung surgery.

Summary I. A home made bronchial block: 1) Easily introduced through the endotracheal tube, non-traumatic, easily fixed and manipulated. 2) Permits, at will, differential inflation of lobes and some segments, as well as suction. 3) Spill-over of secretions, cyst fluid and blood, are reduced to a minimum. 4) Allows a greater amount of functioning parenchyma. II. Antihistaminics are routinely used in conjunction with continuous venocylsis of blood and artificial serums. 1) Serum reactions are reduced to a minimum. 2) Specially adapted to prevent anaphylactic shock in hydatid disease of the lung. III. The use of a new type of pressure spray for local anesthesia of the pharynx and tracheobronchial tree.