Inflation Instability Research Articles

The Design of a 'Two-Pillar' Monetary Policy Strategy

In this paper, it is argued that money supply in a narrow sense and repo interest rate are two independent monetary policy instruments when the effect of interest rate policy cannot be efficiently transmitted to the economy through the monetary and financial markets. In this case, the control of money supply is necessary to reduce the discrepancy between the repo interest rate and the interest rates at which private agents lend and borrow. Using a simple macro-economic model, this study shows how a twopillar monetary policy strategy as practiced by the European central bank (ECB) can be conceived to guarantee macroeconomic stability and the credibility of monetary policy. This strategy can be interpreted as a combination of inflation targeting and monetary targeting. Well conceived monetary targeting with a commitment to a long-run money growth rate corresponding to inflation target could reinforce the credibility of central bank announcements and the role of inflation target as strong and credible nominal anchor for private inflation expectations. However, an inflation-targeting regime associated with Friedman’s money supply rule can generate dynamic instability in output, inflation and money demand. Three feedback monetary targeting rules, of which the design depends on economic structure and central bank preferences, are discussed relative to their capability of warranting macroeconomic stability.

Currency Substitution and Central Bank Independence in the Central and Eastern European Economies

This paper examines the extent to which the confrontation between the authorities implementing the monetary policy and the private agents asking for foreign currencies can influence the global process of currency substitution. The choice of an appropriate monetary policy depends on an original time-inconsistency problem where a partly-independent and conservative central bank is faced with a type of monetary targeting. The motives of the private agents in asking for foreign currencies are precautionary and/or speculative. We obtain the optimal growth of the aggregate in foreign currencies, which negatively depends on transparency, central bank credibility and inflation instability of the economy linked with the currency, and positively on inflation instability of the domestic economy. Then, we propose different measures of these determinants and we econometrically test this optimum in the economies of Central and Eastern Europe. The results are consistent with empirical literature on the macroeconomic determinants of dollarization. However, in this paper, the complexity of currency substitution is better illustrated and an empirical approach in relation to the institutional determinants of currency substitution is provided.

An employment targeting framework for central bank policy in South Africa

This paper presents an employment targeting (ET) framework as an alternative to an inflation targeting monetary policy framework for South Africa. The framework incorporates some of the advantages normally claimed for a targeting framework – namely, enhancing transparency and accountability – while focusing the goals of monetary policy more directly on critical macroeconomic problems facing the South African economy, namely, employment, subject, of course, to an inflation constraint. Re‐orienting monetary policy toward generating employment will require that monetary policy re‐develop and utilize a multiplicity of monetary policy and credit tools, including tools for credit allocation and capital management. The paper presents a VAR based simulation model for South Africa that shows that more expansionary monetary policy can contribute to faster economic growth without seriously exacerbating inflation or exchange rate instability.

Taylor Rule Under Financial Instability

This paper contributes to the analysis of monetary policy in the face of financial instability. In particular, we extend the standard new Keynesian dynamic stochastic general equilibrium (DSGE) model with sticky prices to include a financial system. Our simulations suggest that if financial instability affects output and inflation with a lag and if the central bank has privileged information about credit risk, monetary policy that responds instantly to increased credit risk can trade off more output and inflation instability today for a faster return to the trend than a policy that follows the simple Taylor rule with only the contemporaneous output gap and inflation.

The Effect of Tidal Inflation Instability on the Mass and Dynamical Evolution of Extrasolar Planets with Ultrashort Periods

We investigate the possibility of substantial inflation of short-period Jupiter-mass planets, as a result of their internal tidal dissipation associated with the synchronization and circularization of their orbits. We employ the simplest prescription based on an equilibrium model with a constant lag angle for all components of the tide. We show the following: (1) In the low-eccentricity limit, the synchronization of the planets' spin with their mean motion is established before tidal dissipation can significantly modify their internal structure. (2) However, above a critical eccentricity, which is a function of the planets' semimajor axis, tidal dissipation of energy during the circularization process can induce planets to inflate in size before their eccentricity is damped. (3) For moderate eccentricities, the planets adjust to stable thermal equilibria in which the rate of their internal tidal dissipation is balanced by the enhanced radiative flux associated with their enlarged radii. (4) For sufficiently large eccentricities, the planets swell beyond two Jupiter radii and their internal degeneracy is partially lifted. Thereafter, their thermal equilibria become unstable and they undergo runaway inflation until their radii exceed the Roche radius. (5) We determine the necessary and sufficient condition for this tidal inflation instability. (6) These results are applied to study short-period planets. We show that for young Jupiter-mass planets, with a period of less than 3 days, an initial radius of about 2RJ, and an orbital eccentricity greater than 0.2, the energy dissipated during the circularization of their orbits is sufficiently intense and protracted to inflate their sizes up to their Roche radii. (7) We estimate the mass-loss rate, the asymptotic planetary masses, and the semimajor axes for various planetary initial orbital parameters. The possibility of gas overflow through both inner (L1) and outer (L2) Lagrangian points for the planets with short periods or large eccentricities is discussed. (8) Planets with more modest eccentricity ( 0.03-0.04 AU) lose mass via Roche lobe overflow mostly through the inner Lagrangian (L1) point. As a result of the conservation of total angular momentum, these mass-losing planets migrate outward, such that their semimajor axes and Roche radii increase while their mass, eccentricity, and tidal dissipation rate decrease until the mass loss is quenched. (9) Based on these results, we suggest that the combined effects of self-regulated mass loss and tidally driven orbital evolution may be responsible for the apparent lack of giant planets with ultrashort periods 3 days. (10) Mass loss during their orbital circularization may also have caused the planets with periods in the range ~3-7 days to be less massive than long-period planets, which are not affected by the star-planet tidal interaction. (11) The accretion of the short-period planets' tidal debris can also lead to the surface layer contamination and metallicity enhancement of their host stars. (12) Among the planets with periods of 1-3 weeks today, some may have migrated outward and attained circular orbits while others may have preserved their initial eccentricity and semimajor axis. Therefore, planets with circular orbits are expected to coexist with those with eccentric orbits in this period range. (13) Gross tidal inflation of planets occurs on the timescale ~106 yr after their formation for a brief interval of ~105 yr. The relatively large sizes of their classical and weak-line T Tauri host stars increase the planets' transit probability. The inflated sizes of the tidally heated planets also increase the eclipse depth of such transit events. Thus, the tidal inflation and disruption of planets may be directly observable around classical and weak-line T Tauri stars.

Bootstrap-Based Inference in Models With a Nearly Noninvertible Moving Average Component

This article proposes a bootstrap method for constructing two-sided confidence intervals for the moving average (MA) parameter in nearly noninvertible models. The confidence intervals are obtained by inverting the acceptance region of the likelihood ratio (LR) test reflecting the asymmetry of the likelihood near the noninvertibility boundary. The limiting distribution of the LR statistic is nonpivotal and its quantiles are parameterized as a function of the MA parameter and then approximated by grid bootstrap. The proposed method is used to investigate the parameter instability in inflation and time variability of risk premium in interest rates.

Regime Shifts, Risk and the Term Structure

This paper develops and estimates a general equilibrium model for the term structures of nominal and real interest rates that incorporates regime-switching into the dynamics of the state variables. The model generates time-varying risk premia via changes in the covariance structure of the state variables and Peso problems through regime-switching. When the model is estimated using real and nominal yields from the U.K., I find that Peso problems emanating from instability in inflation have a significant impact on the nominal term structure. Peso problems affect (i) the sample predictability of excess returns, (ii) nominal term premia, and (iii) the inflation risk premia linking real and nominal yields with expected inflation.

Demand for Greek imports using multivariate cointegration techniques

Starting from a theoretical model with importable, traded and nontraded goods, we identify a long run relationship among Greek imports, domestic activity and relative prices. The model supports weak exogeneity of relative prices which means that Greek importers take the price of imports as given. The greater than one income elasticity, which persists even when cyclical demand effects are netted out, means that Greece faces an external constraint on growth as verified by the negative effect of the disequilibrium error in the short run output equation. The findings of this paper suggest that the price of domestic tradeables and nontradeables are significant determinants of the long run and short run import demand, while instability in domestic inflation is found to have a strong short run depressing effect on domestic activity.

The Australian Mining Industry Council, 1967–75

As the long boom that followed the Second World War ended in inflation, unemployment and exchange rate instability, business peak associations became more active on a range of policy issues. Industries that had not seen value in such forms of political organisation in the past established them. Australian mining companies created the Australian Mining Industry Council (AMIC) to lobby the government over changes in the exchange rate, wages and budgetary policy, foreign investment guidelines and tariffs on imports of machinery and raw materials. In this the AMIC was often drawn into conflicts with manufacturer organisations that represented industries catering for the domestic market, whereas mining companies relied heavily on foreign investment and export sales. The AMIC was also very active in opposing attempts by government to interfere in the contractual negotiations between mining companies and overseas buyers of minerals and metals. Apart from economic policy issues, the mining industry faced challenges from the environmental movement and indigenous Aboriginal claims for land rights that placed barriers in the way of easy access to deposits. These challenges required innovative and flexible industry-wide approaches to influence government legislation and public opinion.

The Compulsive Shift to Institutional Analysis

Over the last half-century, the pervasive grip of the Marshallian/Hicksian orthodoxy on the minds and hearts of an increasing number of economists and policy makers appears to have relaxed, despite, perhaps, desires to the contrary. Untoward and pervasive events and circumstances have produced successive and urgent demands for divergent and more relevant social, political, and economic policy responses. The Great Depression was the forcing bed for the Keynesian revolutionary formulations. World War II required the advent of aggregate integrative planning and control of a war economy. The conspicuous emergence of the postcolonial Third World generated an ambitious, and at times heretical, quest to invoke and accelerate growth and development in poor countries. The domestic concern to reactivate the economy and make war on poverty in the 1960s led to the use and refinement of Keynesian-based fine tuning demand management and to an attack on structural malfunctions in the economy. The convulsive and worsening instability of concurrent unemployment and inflation, especially in the last decade, has forced attentive theorists and policy framers out of habitual views into what is for them new, unfamiliar, and uncharted areas of the unconventional and the unorthodox. It is a contention of this article that the aforementioned events and

Estimating Agricultural Use Values in New York State

creased prices, development patterns and economic growth are among the most important. Improvements in transportation, rising incomes, and a preference for single-family dwellings, for example, have contributed to horizontal development patterns, urban sprawl, and increased competition for land at the rural-urban fringe. Although Zeimetz et al. argue that urbanization has not greatly encroached upon the total supply of U.S. land for crops [1976, p. 1], increases in agricultural land values have preceded much of this urbanization. To complicate the situation, part of the rise in agricultural land values is caused by recent instability in agricultural prices and general inflation. Through farmto-farm sales of land and the invest-

The Federal Government's Weapons to Fight Inflation and Economic Instability

The federal government has never explicitly de clared that prevention of inflation is its responsibility, and only recently has a strong opinion arisen that such a declaration should be made, possibly by amendment of the Employment Act of 1946. Some of those who desire price stability believe that, to achieve it, the federal government should add control over installment purchases and over major wage contracts to its repertoire. They feel that fiscal policy, depending upon Congress, is untrustworthy and that a tight monetary policy does not quickly reach important sectors of the economy. Op position to federal assumption of responsibility for price sta bility comes especially from those who fear that its implemen tation will slow up economic growth. In their view, the "cost- push" is chiefly responsible for our recent inflation and for the prospect that creeping inflation lies ahead. It should be ac cepted as a fact of economic life, with some effort to miti gate its inequities through widespread extension of escalation. Such a step is, however, to be opposed both on grounds of equity and of theory. Widespread escalation is not feasible, and creeping inflation, if accepted as policy, will create eco nomic disorder rather than accelerated growth.