Trend Inflation Research Articles

ІНФЛЯЦІЯ: СУТНІСТЬ, ВИДИ ТА ШЛЯХИ ПОДОЛАННЯ


 
 
 The strengthening of inflationary trends in the economy and the significant consequences and problems of further development of the state identified the subject of this study. The purpose of the work is to find out the causes of inflationary processes and ways to overcome them.
 
 

Monetary Policy, Trend Inflation, and Unemployment Volatility

AbstractThe literature has long agreed that the DMP model (after Diamond 1982, Mortensen 1982, Pissarides 1985) with search and matching frictions in the labor market can deliver large volatilities in labor market quantities, consistent with empirical data, only if there is at least some wage stickiness. I show, however, that the model can deliver nontrivial volatilities without wage stickiness, as long as it has price dispersion and nonzero long‐run inflation rates. I find that by keeping inflation at a positive rate, monetary policy may be accountable for the large standard deviations observed on labor market variables. In addition, the Shimer (2005) puzzle disappears under monetary policy shocks.

Positive trend inflation and the Phillips curve – A tale of two slopes and various impulse responses

Standard small-scale New Keynesian models (NKM) come with considerable output losses from moderate positive steady-state inflation when the long-run output-inflation relationship is derived from the microeconomic equations. We analyse 1. which trend-inflation-dependent parameter change might move the New Keynesian model’s long-run Phillips curve (LRPC) towards superneutrality and hence bring about a more moderate output impact of steady-state inflation and 2. whether this same parameter change also turns the linearised short-run New Keynesian Phillips curve (NKPC) into the empirically found direction across different trend inflation rates.The parameter change across trend inflation rates should be at least tentatively empirically justified. Two parameters meet our criteria: the usual suspect, the Calvo-parameter, and the intertemporal elasticity of substitution. Last but not least, allowing these parameters to change across trend inflation rates produces impulse responses more in line with “stylised facts” than those of a constant parameter trend inflation model. We consider the impact of each trend-inflation-dependent parameter separately but also a combination of the two.

External Cyclicality in the Face of Aggregate Demand Shocks: Pros and Cons Across Developed and Developing Countries

The paper studies variation in the effects of aggregate demand shocks on the external sector and underlying components and distinguishes between the effects of expansionary and contractionary shocks. The aim is to study the determinants and implications of cyclicality across advanced and developing countries. The composite evidence points to high degree of cyclicality in many countries. Based on time‐series correlations, there is a stronger cyclical co‐movement between the trade and current account balances across advanced countries, compared to developing countries. Further, fluctuations in the financial balance are dependent on developments in exports in many developing countries. The determinants of external vulnerability vary with macroeconomic indicators. The evidence points to higher vulnerability of the external balance with respect to higher trend inflation across developing countries. In addition, constraints on capacity in developing countries could risk external stability as trend growth increases across countries. Government spending is an important determinant of external stability in developing countries, reflecting the adverse implications of higher government spending and a widening fiscal deficit on debt sustainability and external financial flows. Further, private consumption is a key driver of aggregate uncertainty and cyclical fluctuations in the external balances across developing countries.

Has trend inflation shifted?: An empirical analysis with an equally-spaced regime-switching model

This paper proposes a new econometric framework for estimating trend inflation and the slope of the Phillips curve with a regime-switching model. A unique aspect of our approach is to assume equally-spaced regimes. In our baseline model, we specify regimes for the trend inflation at one-percent intervals. This framework serves as a parsimonious trend inflation model, and the estimated probability of the trend inflation being in each regime provides an easily interpretable illustration in policy debate and analysis. An empirical result for the United States shows a considerably stable trend inflation at two percent since the late 1990s. A result for Japan indicates that the trend inflation stayed at zero percent for about 15 years after the late 1990s, and then shifted away from zero percent after the introduction of the price stability target and the quantitative and qualitative monetary easing in 2013.

Variable Elasticity Demand and Inflation Persistence

We propose a novel explanation for the well-known persistent inflation response to monetary policy shocks by introducing variable elasticity demand curves in a staggered price model with trend inflation. The demand curves induce strategic complementarity in price setting and thus generate inflation persistence under positive trend inflation through the effect on inflation dynamics of a measure of price dispersion, which differs from relative price distortion. We also show that credible disinflation leads to a gradual decline in inflation a fall in output and that lower trend inflation reduces inflation persistence, as observed around the time of the Volcker disinflation.

Variable Elasticity Demand and Inflation Persistence

Persistent responses of inflation to monetary policy shocks have been difficult to explain by existing models of the monetary transmission mechanism without embedding controversial intrinsic inertia of inflation. Our paper addresses this issue using a staggered price model with trend inflation, a smoothed-off kink in demand curves, and a fixed cost of production. In this model, inflation exhibits a persistent response to a policy shock even in the absence of its intrinsic inertia, because the kink causes a measure of price dispersion, which is intrinsically inertial, to become a key source of inflation persistence under the positive trend inflation rate. {{p}} In addition, output and labor productivity both rise after an expansionary policy shock as in an estimated structural vector autoregression model. Moreover, credible disinflation induces a gradual decline in inflation and a fall in output as observed during the Volcker disinflation era.

Low-mass eclipsing binaries in the WFCAM Transit Survey: the persistence of the M-dwarf radius inflation problem

We present the characterization of 5 new short-period low-mass eclipsing binaries from the WFCAM Transit Survey. The analysis was performed by using the photometric WFCAM J-mag data and additional low- and intermediate-resolution spectroscopic data to obtain both orbital and physical properties of the studied sample. The light curves and the measured radial velocity curves were modeled simultaneously with the JKTEBOP code, with Markov chain Monte Carlo simulations for the error estimates. The best-model fit have revealed that the investigated detached binaries are in very close orbits, with orbital separations of $2.9 \leq a \leq 6.7$ $R_{\odot}$ and short periods of $0.59 \leq P_{\rm orb} \leq 1.72$ d, approximately. We have derived stellar masses between $0.24$ and $0.72$ $M_{\odot}$ and radii ranging from $0.42$ to $0.67$ $R_{\odot}$. The great majority of the LMEBs in our sample has an estimated radius far from the predicted values according to evolutionary models. The components with derived masses of $M < 0.6$ $M_{\odot}$ present a radius inflation of $\sim$$9\%$ or more. This general behavior follows the trend of inflation for partially-radiative stars proposed previously. These systems add to the increasing sample of low-mass stellar radii that are not well-reproduced by stellar models. They further highlight the need to understand the magnetic activity and physical state of small stars. Missions like TESS will provide many such systems to perform high-precision radius measurements to tightly constrain low-mass stellar evolution models.

Using Machine Learning and Sentiment Analysis in Official Statistics

This paper provides a framework for analyzing different dimensions of Official Statistics based on the sentiments conveyed from various sources such as policy statements, expectation surveys, survey of professional forecasters, etc. This study for investigating the dynamics of inflation in India is based on the sentiments conveyed from Daily Newspaper, Household’s Inflation Expectation Survey, Survey of Professional Forecasters on Macroeconomic Indicators and Consumer Confidence Survey. The study uses applications such as Mathematica, etc. to apply different Machine Learning Models to learn the outcome of sentiments and provide a platform for determining the Inflation Trend. Further, an overview of Blockchain application for distributed and secure ML Models for Official Statistics is also discussed.

A New Model of Inflation, Trend Inflation, and Long‐Run Inflation Expectations

AbstractThis paper develops a bivariate model of inflation and a survey‐based long‐run forecast of inflation that allows for the estimation of the link between trend inflation and the long‐run forecast. Thus, our model allows for the possibilities that long‐run forecasts taken from surveys can be equated with trend inflation, that the two are completely unrelated, or anything in between. Using a variety of inflation measures and survey‐based forecasts for several countries, we find that long‐run forecasts can provide substantial help in refining estimates and fitting and forecasting inflation. It is less helpful to simply equate trend inflation with the long‐run forecasts.

Can Trend Inflation Solve the Delayed Overshooting Puzzle?

We develop an open economy New Keynesian model with heterogeneity in price stickiness and positive trend inflation. The main insight of our analysis is that, in the presence of heterogeneity in price stickiness, there is a strong link between trend inflation and the timing of the peak response of the real exchange rate to a monetary policy shock. Without trend inflation, the real exchange rate peaks almost immediately. With trend inflation set at historical values, the peak occurs at around 2 years. Delayed overshooting is a consequence of the interaction between heterogeneity in price stickiness and trend inflation.

Trend Inflation and Inflation Compensation

This paper incorporates market-based inflation expectations to the growing literature on trend inflation estimation, and finds that there has been a significant decline in euro area trend inflation since 2013. This finding is robust to using different measures of long-term inflation expectations in the estimation, both market-based and surveys. That evidence: (i) supports the expansion of ECB’s UMP measures since 2015; (ii) provides a metric to monitor long-term inflation expectations following their introduction, and the likelihood of a sustained return of inflation towards levels below, but close to, 2% over the medium term

High Trend Inflation and Passive Monetary Detours

According to the long-run Taylor principle (Davig and Leeper, 2007), a central bank can deviate to a passive monetary policy and still obtain equilibrium uniqueness if a sufficiently aggressive monetary policy is expected for the future. Does this principle hold true when both monetary and fiscal policies can switch between active and passive and there is positive trend inflation? We find that passive monetary detours are no longer possible when trend inflation is high, whatever fiscal policy is in place. This has important policy implications in terms of flexibility and monetary-fiscal authorities coordination.

Trend Inflation and Inflation Compensation

This paper incorporates market-based inflation expectations to the growing literature on trend inflation estimation, and finds that there has been a significant decline in euro area trend inflation since 2013. This finding is robust to using different measures of long-term inflation expectations in the estimation, both market-based and surveys. That evidence: (i) supports the expansion of ECB’s UMP measures since 2015; (ii) provides a metric to monitor long-term inflation expectations following their introduction, and the likelihood of a sustained return of inflation towards levels below, but close to, 2% over the medium term

Comment on “Why Has Japan Failed to Escape from Deflation?”

Understanding the price dynamics is always at the heart of studies on monetary policy. If prices are flexible, there is no need for monetary policy as a stabilization tool. If not, central banks should offer some nominal anchor so that welfare costs stemming from relative price dispersion should be reduced. Watanabe and Watanabe (2018) conduct careful analyses using micro data. Two main conclusions are: a simple menu cost model can explain the price developments in Japan well in that “there is a negative correlation between trend inflation and the share of items whose rate of price change is near zero,”1 and the “inflation norm” is too low in Japan. Watanabe and Watanabe provide comprehensive empirical facts to support these two conclusions. It also merits attention that the observed empirical regularities are replicated with simulations using a simple menu cost model. Structural interpretations of the empirical findings are offered albeit indirectly via model simulation. Not only do Watanabe and Watanabe offer convincing facts in understanding the Japanese economy from the view point of positive analysis, but also the findings in their paper have an immediate policy implication: It is not easy for Japan to attain an inflation target of 2%. Papers with important facts and significant policy implications are always good and highly appreciated. Watanabe and Watanabe's paper is one of these good papers. Thus, I do not have any particular comments to oppose their main conclusions. Let me comment on what we do not know from the data, and the policy implication. We do not know the markups in individual goods. In their menu cost model, nominal rigidities are favored as the way to explain price developments in Japan. This conclusion is mainly supported by the analyses in Sections 2.2 and 2.3 about the flattening of the reduced-form Phillips curve. However, we still cannot conclude that this less clearer relationship between inflation and unemployment rates is as a result of higher nominal rigidities possibly due to menu costs, since we cannot observe marginal costs. The relationship between inflation and unemployment rates can be just a reduced-form one. In the language of the New Keynesian model, unemployment or the output gap must be structurally related to markups. Otherwise, a causal argument is not possible. I am not fully sure whether such a relationship is stemming from menu costs or higher real rigidities around zero inflation rates. Real rigidities arise when marginal costs are sticky or marginal revenues are flexible. The former can be caused by habit formation in consumption, endogenous capacity utilization or investment growth adjustment costs as included in the canonical dynamic stochastic general equilibrium (DSGE) model a la Christiano et al. (2005), while the latter can emerge with a kinked demand curve as examined in the first-generation New Keynesian Model a la Kimball (1995). In order to identify the causes of the less clearer relationship between inflation and unemployment rates, it would be ideal if we can use the marginal cost data as examined in Eichenbaum et al. (2011). The inability to observe markups means that a careful interpretation of the analyses in Watanabe and Watanabe's section 4 is required. If the relationship between unemployment and markup is not stable nor structural, increasing real rigidities around zero inflation rates can explain the fact that “price stickiness as measured by the share of unchanged items increases as the inflation rate declines from a positive value to zero.” More stickiness around lower inflation rates should imply higher welfare costs stemming from relative price dispersions. On the other hand, menu costs are small near zero inflation rates. Besides the problems due to the zero lower bound on nominal interest rates, should the central bank really care about inflation developments near zero inflation rates? This point is related to the conclusion made by Nakamura et al. (2016) that “the main costs of inflation in the New Keynesian model are completely elusive in the data. This implies that the strong conclusions about optimality of low inflation rates reached by researchers using models of this kind need to be reassessed.”

Research on the Interference Trend of National Taxation with Price and Inflation

In view of the objective reality that the market prices stay high in recent years, inflation which continues to rise is not effectively inhibited, combined with the previous economic circles who attributed the reasons to inflation for commodity supply and demand, the issuance of money and neglect the role of tax factors led to national governance inflation decision-making that is limited by the phenomenon. By means of comparative analysis, Granger causality analysis and Augmented Dickey-Fuller test, we dissect the external disturbance and endogenous factors of influencing inflation, select the 2001-2016 tax index and CPI index and make an empirical research of the interference from government taxation to price and inflation trends and strength. It is approved there is single causal relationship between tax and price rising, and sums up that government taxation can promote inflation, but inflation can’t lead to tax rising. Of course, this conclusion can also provide theoretical support for national governance of inflation.

Positive Trend Inflation and Determinacy in a Medium-Sized New Keynesian Model

This paper studies the challenge that increasing the inflation target poses to equilibrium determinacy in a medium-sized New Keynesian model without indexation fitted to the Great Moderation era. For moderate targets of the inflation rate, such as 2 or 4 percent, the probability of determinacy is near one conditional on the monetary policy rule of the estimated model. However, this probability drops significantly conditional on model-free estimates of the monetary policy rule based on real-time data. The difference is driven by the larger response of the federal funds rate to the output gap associated with the latter estimates.

Do We Really Know that US Monetary Policy Was Destabilizing in the 1970s?

The paper re-examines whether the Federal Reserve’s monetary policy was a source of instability during the Great Inflation by estimating a sticky-price model with positive trend inflation, commodity price shocks and sluggish real wages. Our estimation provides empirical evidence for substantial wage-rigidity and finds that the Federal Reserve responded aggressively to inflation but negligibly to the output gap. In the presence of non-trivial real imperfections and well-identified commodity price-shocks, U.S. data prefers a determinate version of the New Keynesian model: monetary policy-induced indeterminacy and sunspots were not causes of macroeconomic instability during the pre-Volcker era.

Positive Trend Inflation and Determinacy in a Medium-Sized New Keynesian Model

This paper studies the challenge that increasing the inflation target poses to equilibrium determinacy in a medium-sized New Keynesian model without indexation fitted to the Great Moderation era. For moderate targets of the inflation rate, such as 2 or 4 percent, the probability of determinacy is near one conditional on the monetary policy rule of the estimated model. However, this probability drops significantly conditional on model-free estimates of the monetary policy rule based on real-time data. The difference is driven by the larger response of the federal funds rate to the output gap associated with the latter estimates.

The Enduring Link between Demography and Inflation

Demographic shifts, such as population ageing, have been suggested as possible explanations for the past decade's low inflation. We exploit cross-country variation in a long panel to identify age structure effects in inflation, controlling for standard monetary factors. A robust relationship emerges that accords with the lifecycle hypothesis. That is, inflationary pressure rises when the share of dependants increases and, conversely, subsides when the share of working age population increases. This relationship accounts for the bulk of trend inflation, for instance, about 7 percentage points of US disinflation since the 1980s. It predicts rising inflation over the coming decades.