Inflation Uncertainty Research Articles

Inflations and its uncertainty in Some ECOWAS member states: Transfer entropy approach

This study examines the information flow between inflation and inflation uncertainty (IU) and intrastate inflationary trend among some ECOWAS member states. IU is measured using GARCH models and stochastic volatility model (SV). Transfer entropy was adopted to quantify the extent of information flow. The result showed information flow exists from inflation to the GARCH measure of IU. On the reverse flow from inflation uncertainty to inflation, there is no information flow except for Burkina Faso and Gambia which have asymmetric bidirectional flow between inflation and IU. Adopting SV measure for IU, there are no support for causality from inflation to IU for all the member states except Burkina Faso and Cabo Verde. For the reverse flow, causality exists in all the member states. On the pairwise inflation trend of member states, inflation trends are interconnected and that shocks in one country may transmit to others except for Gambia, Cote d’Ivoire and Burkina Faso. Specifically, Guinea, Liberia and Nigeria inflation shocks have the greatest effect on other WAMZ members within the study period, whereas inflation trend in Benin, Niger and Cote d’Ivoire are the most influential among WAEMU states. In conclusion, inflation - IU relationship is sensitive to how IU is measured leading to mixed findings. This study recommends the need for price stability among the ECOWAS member states. Given the interdependence among some members of each bloc of ECOWAS, policy synchronization on price stability could enhance the overall objective of single digit inflation and reduce the welfare effect of inflation uncertainty.

Understanding Consumer Inflation Expectations during the COVID-19 Pandemic.

We study how individuals' formation of inflation expectations are affected by the stringent containment and economic support measures put in place during the COVID‐19 pandemic. Using the New York Fed Survey of Consumer Expectations (SCE) and the Oxford COVID‐19 Government Response Tracker (OxCGRT), we find that policies aimed at containing the pandemic lead to an increase in individuals' inflation expectations and inflation uncertainty. We also find some heterogeneity in the impact across different demographic groups.

Commodity prices, inflation and inflation uncertainty among emerging economies

PurposeThis paper examines the role price fluctuations associated with internationally traded commodities play in inflationary conditions and inflation uncertainty among economies in Sub-Saharan Africa.Design/methodology/approachUsing a panel 32 countries from the sub-region from 1996 to 2019, this study employed Two-Step System Generalized Method of Moments (GMM) estimation technique in its analysis.FindingsEmpirical evidence demonstrates that fluctuations in forex-adjusted price of crude oil, gold and cocoa have significant positive impact on inflation while forex-adjusted changes in price of cotton tend to have significant negative influence on consumer price inflation among economies in the sub-region. Additionally, the study found that gold, cocoa and cotton price changes on the international market have significant positive impact on inflation uncertainty in the sub-region (rise in price leads to increase rate of inflation uncertainty). Furthermore, improved regulatory quality and growth in output growth (GDP per capita growth) were found to help in stabilizing inflation uncertainty (reduce inflation uncertainty) among economies in the sub-region during periods of persistent growth in general price levels.Originality/valueThe study present a different approach based on individual economy forex-adjusted global prices of internationally traded commodities instead of general prices often used in the literature and assessed the effects such adjusted commodity prices have on inflation and inflation uncertainty. Additionally, the moderating role of regulatory quality and output growth between surmised nexuses are also examined.

The Effect of Inflation Targeting (IT) Policy on the Inflation Uncertainty and Economic Growth in Selected African and European Countries

The study assessed the effect of inflation targeting (IT) policy on inflation uncertainty and economic growth in African and European IT countries. This study contributes to the existing knowledge by analysing and comparing the African IT and European IT countries using two advanced approaches which include the Generalized Autoregressive Conditional Heteroscedasticity (GARCH) and Panel Vector Autoregressive (PVAR). To determine how the IT policy affects the inflation uncertainty in selected countries, time series techniques were employed. Panel data approaches were used to determine the effect of inflation targeting on economic growth in the selected countries. The results are as follows: (1) Inflation Targeting policy is insignificant in reducing inflation uncertainty in South Africa, and the effect of the policy in Ghana is inconclusive; (2) The IT policy has a significant impact in reducing inflation uncertainty in European countries (i.e., Poland and the Czech Republic); (3) Inflation targeting has a negative impact on economic growth in African Countries; (4) The policy has a positive impact on economic growth in European Countries; (5) In comparison to European countries, the strategy has a negligible impact on economic growth in Africa. Overall, the results suggest that European countries inflation targeting regimes are more credible in terms of reducing the level of inflation uncertainty and sustaining economic growth compared to African countries. In this respect, policymakers must ensure that they assess the economic condition of an individual country before implementing such a policy.

Forecasting US Equity and Bond Correlation—A Machine Learning Approach

The stock–bond correlation is a cornerstone of every asset allocation decision, but estimating it reliably can prove to be challenging given the potential for co-movements to fluctuate significantly based on economic conditions. Using supervised machine learning techniques, this article presents a new approach for identifying key determinants of the correlation between US equity and bond returns, ultimately finding that inflation, alongside real yields, equity volatility, economic growth, and inflation uncertainty, predict changes in correlation dynamics overtime. Relative to the existing literature, the authors’ approach allows for the systematic detection of the main drivers of stock–bond correlation and uncovers the time variation in importance of each determinant across economic regimes. Upon conducting an out-of-sample portfolio evaluation, the authors show that the five factors with gradient boosting regression approach outperforms all other existing factor-based models in estimating both the trend and level of correlation, thereby offering an alternative robust solution for forecasting time-varying equity and bond co-movements that can be further applied to asset allocation decisions and risk management.

Enflasyon Belirsizliği ve Friedman-Ball Hipotezi: Türkiye Örneği

Friedman-Ball's hypothesis draws attention to the invisible additional costs of inflation, which results from increasing inflation uncertainty. The hypothesis argues that there is a positive relationship between inflation and inflation uncertainty, and that increasing inflation brings along more inflation uncertainty due to an asymmetric information problem. In the literature, discussions about the relationship between inflation and inflation uncertainty started with Okun (1971), Gordon (1971), and continued with Friedman (1977), Ball (1992). At the present, interest in this issue has decreased significantly, due to the fact that inflation rates are at moderate levels in most countries and are even negative (deflation) in a small number of countries.
 In some countries including Turkey, however, the inflation problem and its resulting costs remain as current and active topics. Indeed, there exist significant literature about whether or not the Friedman-Ball hypothesis is valid for the Turkish economy. Some of the most important studies about the inflation and the resulting uncertainty in Turkey are done by Neyaptı and Kaya (2001), Berüment, et al. (2003).
 The motivation and the purpose of this study is updating the research on the high inflation and inflation uncertainty, the resulting costs with respect to macroeconomic variables such as investments and production, which may hinder the long-run economic growth performance in Turkey. This study examines new evidence about the validity of the Friedman-Ball hypothesis for the Turkish economy utilizing data over the period of 1985:01 – 2020:12. The results of the TGARCH and EGARCH models verify the validity of the Friedman-Ball hypothesis for Turkey and indicate that high inflation increases inflation uncertainty both in the short- and long-run. Overall, the analyses point out to the importance of striving against inflation because the problem may be more than just high inflation due to its aforementioned invisible additional costs.

Impact of Inflation on The Economic Development of Malaysia

This paper analyses inflation determinants in Malaysia, employing economic indicators. The research expands analytical work on inflation theory determinants in three respects. Second, it looks at a much larger variety of economic variables, all of which are empirically evaluated in various countries. Third, given the different analytical consequences of the economic indicators for each region, the author analyses those precisely concerning inflation determinants based on Malaysian economic performance over the past 43 years, from 1971 to 2013. Besides, more than five literature reviews to identify economic success and inflation are used to do this study. Finally, the third goal of the research is to distinguish inflation causes between different and dependent variables through the Multiple Regression Process. A basic reason for finding a long-term approach is to obtain information about inflation determinants in Malaysia. However, it was not limitable as a proxy for money supplies in Malaysia for high monetary growth (annual percentages). In addition, it is also comprised of macro economically inflation uncertainties, energy, foreign exchange; Imports, and the gross domestic product for goods and services.

Deflationary Financial Shocks and Inflationary Uncertainty Shocks: An SVAR Investigation

Deflationary Financial Shocks and Inflationary Uncertainty Shocks: An SVAR Investigation

Do oil prices and economic policy uncertainty matter for precious metal returns? New insights from a TVP-VAR framework

Oil price shocks and economic policy uncertainty are the two main drivers of many macroeconomic and financial variables. In the context of commodity financialization, these two shocks are more interrelated and even have a combined effect on the precious metals market. Therefore, using the time-varying parameter vector autoregression (TVP-VAR) framework, we actively analyze the dynamic impacts of oil price shocks and economic policy uncertainty on precious metal returns using monthly data from April 1990 to April 2018. The results show that oil price shocks had positive effects on precious metal returns before the international financial crisis, while these impacts have been negative since the international financial crisis. The impacts of economic policy uncertainty on precious metal returns change over time and are positive in most cases. The effects of oil price shocks on precious metal returns are amplified by economic policy uncertainty. In the field of transmission channels of economic policy uncertainty, we find that news uncertainty and inflation uncertainty are the most significant. In addition, during a major economic crisis or emergency, we discover some evidence of overreactions in the precious metal markets.

Does domestic investment respond to inflation targeting? A synthetic control investigation

Some countries have adopted an Inflation Targeting (IT) regime to reduce inflation and inflation uncertainty: two factors the literature suggests firms put positive weight on when making outlay decisions that may affect aggregate domestic investment. This observation naturally leads to the question of whether domestic investment responds to IT. We apply the synthetic control method to developed and developing IT and non-IT countries to estimate the IT regime's causal effect on the domestic investment over time while addressing country heterogeneity. Adopting an IT regime had no short or long-run effect, at conventional levels of significance, on domestic investment in 21 out of 29 treated countries; this dominant pattern appears consistent with recent works on rational inattentive behaviour of firms. However, IT induced mainly long-run heterogeneous changes in domestic investment prices in 9 targeters, suggesting that supply constraints external to firms can also weaken the link between IT and domestic investment.

Uncertainty and disagreement of inflation expectations: Evidence from household‐level qualitative survey responses

AbstractWe propose a procedure that jointly estimates expectation, uncertainty, and disagreement using a flexible hierarchical ordered response model and individual‐level qualitative data. Based on the Michigan survey of US consumers, our results reveal how their inflation expectations and the associated uncertainty are affected by various factors, including their perceptions of economic conditions, recollections of relevant news reports, and sociodemographic characteristics. An examination of the dynamics of inflation uncertainty and disagreement produces evidence in support of using the latter as a proxy of the former. However, our results also highlight important episodes (such as the start of the COVID pandemic) in which the two series diverge.

Entropic Uncertainty for Two Coupled Dipole Spins Using Quantum Memory under the Dzyaloshinskii-Moriya Interaction.

In the thermodynamic equilibrium of dipolar-coupled spin systems under the influence of a Dzyaloshinskii–Moriya (D–M) interaction along the z-axis, the current study explores the quantum-memory-assisted entropic uncertainty relation (QMA-EUR), entropy mixedness and the concurrence two-spin entanglement. Quantum entanglement is reduced at increased temperature values, but inflation uncertainty and mixedness are enhanced. The considered quantum effects are stabilized to their stationary values at high temperatures. The two-spin entanglement is entirely repressed if the D–M interaction is disregarded, and the entropic uncertainty and entropy mixedness reach their maximum values for equal coupling rates. Rather than the concurrence, the entropy mixedness can be a proper indicator of the nature of the entropic uncertainty. The effect of model parameters (D–M coupling and dipole–dipole spin) on the quantum dynamic effects in thermal environment temperature is explored. The results reveal that the model parameters cause significant variations in the predicted QMA-EUR.

Inflation anchoring and growth: The role of credit constraints

Can inflation anchoring foster growth? To answer this question, we use panel data on sectoral growth for 22 manufacturing industries from 39 advanced and emerging market economies over 1990–2014 and employ a difference-in-differences strategy based on the theoretical prediction that higher inflation uncertainty particularly depresses investment in industries that are more credit constrained. Industries characterized by high external financial dependence, liquidity needs, and R&D intensity, and low asset tangibility, tend to grow faster in countries with well-anchored inflation expectations. The results, based on an IV approach—using indicators of monetary policy transparency and central bank independence as instruments—confirm our findings.

Inflation and Inflation Uncertainty in Growth Model of Barro: An Application of Random Forest Model

One of the major problems of the empirical economists while building an economic
 model is the selection of variables which should be included in the true regression
 model. Conventional econometrics use several model selection criteria to determine
 the variables. Recent years' developments in Machine Learning (ML) approaches introduced 
 an alternative way to select variables. In this paper, we have an application
 of ML to select variables to include for a nonlinear relationship between inflation and
 economic growth. Among ML methodologies, Random Forest
 approach is one of the most powerful to capture nonlinear relationships. Therefore,
 we applied RF and found that both high and low inflation can be the cause of low
 economic growth which is a major contribution of the paper to economic literature. 
 Moreover, in the paper, as an outcome of RF there are other variables effecting
 economic growth with an order of importance.

Corporate performance volatility: a micro-level perspective

PurposeThis study examines how specific micro-level macroeconomic indicators influence corporate performance volatility among US corporate bodies in the short run.Design/methodology/approachThe study employs error correction autoregressive distributed lagged (ARDL) model (ECM) to examine how micro-level variables influence volatility associated with corporate performance in the short run.FindingsThis paper finds that disaggregated or micro-level variables examined, tend to exhibit features that are not readily apparent from the aggregate variable from which such variables are derived. For instance, reported empirical estimate suggests that, growth in expenditures on services and nondurable goods tend to lower volatility associated with corporate performance, whereas government expenditures and expenditures on durable goods rather worsens volatility associated with corporate performance, all things being equal. Additionally, presented empirical estimates further provide evidence suggesting that macroeconomic uncertainty and inflation uncertainty significantly moderate or influence the extent to which disaggregated variables impact corporate performance volatility.Originality/valueCompared to related studies in the reviewed literature, this study rather examines volatility associated with corporate performance instead of the corporate performance indicator itself. Additionally, this paper also examines how disaggregated variable instead of aggregate variables impact such volatility. Finally, the moderating role of key macroeconomic conditions in such a relationship is also examined.

How economic crises affect inflation beliefs: Evidence from the Covid-19 pandemic

This paper studies how inflation beliefs reported in the New York Fed's Survey of Consumer Expectations have evolved over the first six months of the Covid-19 pandemic. We find that household inflation expectations responded slowly and mostly at the short-term horizon. In contrast, the data reveal immediate and unprecedented increases in individual inflation uncertainty and in inflation disagreement across respondents. Consistent with precautionary saving, the rise in inflation uncertainty is shown to be associated with how respondents used the stimulus checks they received as part of the 2020 CARES Act. We also find evidence of a strong polarization in inflation beliefs and we identify differences across demographic groups.

Interest Rates: The Cause or The Result? A Chicken and Egg Problem Revisited (The Relationship between Interest Rates and Inflation in Turkey)

This paper investigates the validity of Fisher’s hypothesis and neo-Fisherian approach for Turkey using cointegration of Pesaran et al. (2001) as well as the methodology of Granger causality developed by Toda and Yamamoto (1995). The scope of the study focuses on flexible inflation targeting period in Turkey. Inflation uncertainty is estimated by employing the GARCH model for the period 2010:M10-2020:M5. Empirical results indicate that there is a positive and significant relationship between nominal interest rates, expected inflation and inflation uncertainty in the long run. The results of Toda and Yamamoto causality suggests that inflation ucertainty and expected inflation effects nominal interest rates. Also inflation is affected by nominal interest rates. The empirical results indicating two way causality provides significant empirical evidence for the presence of the Neo- Fisher effect in addition to the Fisher’s hypothesis during the flexible inflation targeting period analyzed in Turkey.

On fiscal and monetary policy-induced macroeconomic volatility dynamics

This paper studies macroeconomic volatility dynamics induced by government spending and monetary policy changes. The policy level and volatility shocks, which are identified through sign restrictions from a time-varying SVAR model, are used to derive explicit functions of macroeconomic volatility impulse responses and decompositions. The SVAR model is specified with time-varying coefficients and stochastic volatility that is included in the mean equation. The empirical results show that the impact of a shock to uncertainty about monetary policy explains about 40% and 25% of output and inflation historical volatility dynamics, respectively, more than other policy shocks since the mid-1980s. The impact of a one-unit government spending level shock on output and inflation uncertainties is equivalent to the impact of about a half unit of a monetary policy volatility shock in the long run, or of about a quarter unit of a monetary policy level shock in the short run.

Effects of inflation uncertainty and exchange rate volatility on money demand in Pakistan: Bayesian econometric analysis

AbstractThe study explores determinants of money demand (M2) in a developing economy of Pakistan using annual data ranging 1976–2017. The study contributes by two ways. Firstly, it specifically examines the potential impact of exchange rate volatility and inflation uncertainty along with conventional determinants on money demand in Pakistan. Secondly, Bayesian Statistical inference is employed and the estimates are interpreted along with highest posterior density intervals (HPDI) with probability statements in order to cope with the issue of the instability of parameters. The analysis explores the positive impact of real income as well as share prices and the negative effect of interest rate on money demand as predicted by theory and earlier findings. Significant negative estimate of exchange rate shows that substitution effect overcomes wealth effect during exchange rate variations. But magnitude of exchange rate elasticity seems to depend upon strength of depreciation rate and/or future expectations, which may be considered an important research question for future work. Insignificance of exchange rate volatility for money demand in Pakistan is found which requires further research as to know about the behaviour of wealth effect and expectation effect during forex market uncertainty. Most importantly, inflation uncertainty is found to be a potential determinant of money demand in Pakistan. Rising uncertainty of inflation rate seems to have direct effects on precautionary and transaction motives of the demand for money. Findings of this study provides useful insights for policymaking in Pakistan as well as in other developing economies by suggesting inflation uncertainty as the potential determinant of money demand. Finally, Bayesian estimates along with HPDI estimates provide new information about the effects and particularly about the possible range of elasticities.

The causal linkage between inflation and inflation uncertainty under structural breaks: Evidence from Turkey

AbstractThe goal of this paper is to examine the relationship between inflation and inflation uncertainty for Turkey through monthly data spanning the period 2004:01–2019:12. To this end, the paper first builds the inflation uncertainty series using inflation data. Second, it examines the cointegration relationship between inflation and inflation uncertainty. Finally, it searches for causal relationships between inflation and inflation uncertainty. The paper employs econometric methods which explicitly consider structural breaks. After examining the inflation–inflation uncertainty nexus for the whole sample, the analysis also investigates this relationship in two subperiods, i.e., 2004:5–2010:10 and 2010:11:2019:12 considering the change in the monetary policy framework of the Central Bank of the Republic of Turkey (CBRT). The findings provide evidence that there exists unidirectional causality running from inflation to inflation uncertainty for both the whole sample and the second subperiod, while there is no causality between inflation and inflation uncertainty for the first subperiod. Overall, the results show that during the second subperiod (i) when the CBRT tried to achieve not only price stability, but also financial stability and (ii) when the inflation rate is more volatile and higher, the increase in the inflation rate results in an increase in inflation uncertainty.