Inflation Uncertainty Research Articles

The Role of Economic Uncertainty in UK Stock Returns

We investigated the role of domestic and international economic uncertainty in the cross-sectional pricing of UK stocks. We considered a broad range of financial market variables in measuring financial conditions to obtain a better estimate of macroeconomic uncertainty compared to previous literature. In contrast to many earlier studies using conventional principal component analysis to estimate economic uncertainty, we constructed new economic activity and inflation uncertainty indices for the UK using a time-varying parameter factor-augmented vector autoregressive (TVP-FAVAR) model. We then estimated stock sensitivity to a range of macroeconomic uncertainty indices and economic policy uncertainty indices. The evidence suggests that economic activity uncertainty and UK economic policy uncertainty have power in explaining the cross-section of UK stock returns, while UK inflation, EU economic policy and US economic policy uncertainty factors are not priced in stock returns for the UK.

Inflation Targeting in Turkey

Inflation targeting strategy has emerged as the result of new pursuits and researches actualized due to insufficiency of monetary policies—implemented for price stability by the central banks until 1990s—in reaching the required consequences in both developed and developing countries, and this strategy had initially been implemented in New Zealand. As this strategy has indicated a successful performance since its implementation, it has become a targeting strategy that many countries struggling with high inflation—including Turkey—prefer and put into practice. In this study, the inflation targeting policy’s conformity to country’s economic cycle, its success, and its effect on macroeconomic factors were analyzed via the model formed by the use of GDP, exchange rate, CPI, interest rate, output gap, and crude oil prices. Inflation targeting regime was examined for the period of 1996:1-2018:4 via the VAR Model, Granger Causality Test, and action-reaction analyses. The results obtained have indicated the presence of expectation and cost inflation, and that it is triggering the inflation. Moreover, it has been observed that inability to reach the targeted value, and inclining trend of inflation are causing uncertainty of inflation.

Fluctuations in Economic Uncertainty and Transmission of Monetary Policy Shocks: Evidence Using Daily Surveys from Brazil

We use a unique Brazilian dataset on daily survey expectations to obtain direct measures of shocks to central bank target rates and changes in economic uncertainty. Using these measures, we gauge the effect of monetary policy shocks on economic uncertainty, term premia, inflation expectations, and bond yields in Brazil. We find strong evidence that inflation uncertainty is key to transmitting monetary policy shocks to the yield curve via time-varying term premia. Finally, Fed announcements have sizeable spillover effects on the Brazilian bond market, as positive shocks to US yields significantly raise term premia in Brazil through elevated exchange rate risk.

The Role of Economic Uncertainty in UK Stock Returns

We investigate the role of domestic and international economic uncertainty in the cross-sectional pricing of UK stocks. We consider a broad range of financial market variables in measuring financial conditions in order to obtain a better estimate of macroeconomic uncertainty compared to previous literature. In contrast to many earlier studies using conventional principal component analysis to estimate economic uncertainty, we construct new economic activity and inflation uncertainty indices for the UK using a time-varying parameter factor-augmented vector autoregressive (TVP-FAVAR) model. We then estimate stock sensitivity to a range of macroeconomic uncertainty indices and economic policy uncertainty indices. The evidence suggests that economic activity uncertainty and UK economic policy uncertainty have power in explaining the cross-section of UK stock returns, while UK inflation, EU economic policy and US economic policy uncertainty factors are not priced in stock returns for the UK.

TÜRKİYE’DE ENFLASYON BELİRSİZLİĞİ İLE FAİZ ORANI ARASINDAKİ NEDENSELLİK İLIŞKİSİ: KAYAN PENCERE NEDENSELLİK TESTİ

The aim of this study is to analyse the impact of inflation uncertainty on the volatility of benchmark interest rate which is the market indicator. In this context, the interest rate of two-year government bonds, which shows general interest rate in the economy and which occurs as a result of the preferences of decision-making units in the money market is considered as a basic variable. Inflation uncertainty is derived from Consumer Price Index (CPI) depending on Friedman’s Approach and is used as an explanatory variable. Because the use of benchmark interest rate includes the knowledge regarding the behaviour of the market decision-making units to inflation and inflation uncertainty, the results obtained are of great importance with regards to the policy proposals. In this study, the effect of inflation uncertainty on the volatility of benchmark interest rate is examined by the volatility and structural break models for the period of 2005:M4-2016:M11. The findings of the study have shown that there is a causal relationship from inflation uncertainty to interest rates between 2005:4 and 2006:5. Additionally, a causal relation from interest rates to inflation uncertainty is observed in the periods of 2013:3 and 2015:12-2016:9.

Sensitivity of Equity Returns to Inflation and Inflation Uncertainty: A Cross-country Evidence

This paper investigates the effect of inflation and inflation uncertainty on equity returns for the data of 41 countries. A GARCH based measure of volatility is used to model inflation uncertainty. The empirical results shows that the effects are not statistically significant in most of the cases, which implies equity investors are not sensitive to inflation and inflation uncertainty. Consistent to existing findings, equity is not a hedge against inflation (and inflation uncertainty) in developed countries; further, emerging and frontier countries are not exception. Inflation uncertainty exerts a negative influence in equity returns. The results are robust to alternative measurements. These results have important implications for asset manager’s diversification purpose and monetary policymaking.

Inflation, Inflation Uncertainty and Asset Returns: Cross Country Evidences

The question whether an asset class is a good hedge against inflation is extensively investigated in the finance and economics literature; however, most of these are concentrated on stock returns from developed countries perspectives with little or no evidence on either from alternative asset classes or emerging and developing countries context. Inflation and inflation volatility have a feedback relationship, which affect investor’s real return. Despite of that literature is also scare on the relationship of inflation uncertainty and asset returns. Against this backdrop, using Fisher hypotheses as benchmark, this paper investigates whether asset return is hedge against inflation and inflation uncertainty for data of 41 developed, emerging and developing countries for 3 asset classes namely, stocks, bonds and real estate. Given varied monetary, exchange rate policies and institutional arrangement across developed and developing countries, the main argument in this paper is that stock and real estate are better inflation hedges than bonds because they constitute claims against real or physical asset and better adjust with inflation shocks, While for bonds higher, inflation reduces the price of bonds through increase in discount rate and hence decrease bonds returns. Our econometric analysis finds support for real estate not for stocks. As anticipated, investors will not be able to hedge inflation by investing in bonds.

Gold price dynamics and the role of uncertainty

This study focuses on the dynamics of the gold price against bonds, stocks and exchange rates based on a disaggregation of the underlying relationships across different frequencies applying a wavelet decomposition. To analyze joint extreme movements (i.e. tail dependence), we adopt a copula approach, which helps us to assess the dependence between the returns of gold and other assets in calm and turmoil market times and therefore the hedge and safe haven functions of gold. We also examine whether gold prices are directly affected by changes in macroeconomic uncertainty, economic policy uncertainty and/or CPI forecasters disagreement. Analyzing data for nine economies for a sample period starting in 1985, we find that the role of gold changes significantly after the collapse of Lehman Brothers in 2008. Gold is unable to serve as a hedge or safe haven in the classical sense while the findings for the period prior to 2008 mostly suggest that gold is able to shield investors. Uncertainty measures display a surprising and time-varying relationship with the path of the gold price. While economic policy uncertainty is positively correlated with gold price changes, macroeconomic uncertainty and inflation uncertainty among forecasters are both negatively related to gold price changes.

Inflation Expectations and Risk Premiums: Implications for Korean Exchange Rates

ABSTRACTNominal yield can be decomposed into real rates, inflation expectations, and inflation risk premia. We estimate an affine term structure model that allows us to decompose nominal bond yields and use the model to study Korea–US exchange rate movements. Our results show that expected inflation and the inflation risk premium have considerable predictive power for Korea–US exchange rates beyond other yield curve factors and macro-variables. In particular, we find that those two nominal factors play a stronger role after 2005. It implies that not only the level of inflation but also inflation uncertainty should be taken into account for predicting Korea–US exchange rates dynamics (JEL classification: E43, F31, G12).

The implications of central bank transparency for uncertainty and disagreement

Using survey data from 25 economies we provide evidence that greater transparency surrounding monetary policy reduces uncertainty of interest rates and inflation, primarily by reducing uncertainty that is common to agents rather than disagreement between agents. This suggests that studies that focus on disagreement as a proxy for uncertainty understate the benefits of monetary policy transparency. The adoption of inflation targets and forward guidance are both associated with lower uncertainty, although inflation targets have a stronger impact on reducing uncertainty than forward guidance. Moreover, there are diminishing benefits from ever higher levels of transparency. Taken as a whole, our results support the contention that clarity of communication is as important as the magnitude of transparency.

INFLATION AND INFLATION UNCERTAINTY IN TURKEY: EVIDENCE FROM EGARCH MODELING

Inflation leads to significant welfare losses to society, even if it is predictable. Inflation uncertainty also has welfare costs via distorted relative prices and resource allocation. Turkish economy experienced high and highly volatile inflation since 1970s. This study investigates the relationship between inflation and inflation uncertainty employing the AR-EGARCH-M model using monthly Turkish inflation data between January 1968 to December 2017. The empirical results suggest that higher inflation rates increased inflation uncertainty in Turkey, providing strong support for the Friedman-Ball hypothesis. However, the response of inflation uncertainty to inflation is negative but not statistically significant. Lastly, the asymmetric effect has been found to be statistically significant, which implies that a positive shock increases inflation uncertainty less than a negative shock.

On the determinants of long-run inflation uncertainty: Evidence from a panel of 17 developed economies

Based on a cross section of 17 advanced economies and data for the period 1975 to 2015, we examine how the interaction between monetary policy and macroeconomic conditions affects inflation uncertainty in the long-term. We construct a proxy for the unobservable inflation uncertainty based on the slowly evolving long-term variance component of inflation from a Spline-GARCH model (Engle and Rangel, 2008). We show that long-run inflation uncertainty is high if an inflation-tolerant central bank governor is in power during a period of high inflation, if the policy rate is below the one that is prescribed by the Taylor rule and during times of heightened stock and exchange rate volatility.

Inflation targeting or exchange rate targeting: Which framework supports the goal of price stability in emerging market economies?

The paper investigates and compares the relationship between inflation and inflation uncertainty under inflation targeting and, alternatively, a conventional fixed exchange rate system, for a group of emerging countries. To do so we estimate GARCH in mean models and we find that there is a bi-directional relationship between inflation and inflation uncertainty under the two monetary regimes. It is also found that the fixed exchange rate regime has no impact on average inflation and inflation inertia, while inflation targeting has been successful at lowering both average inflation and inflation persistence.

US inflation and inflation uncertainty over 200 years

This article uses historical US inflation data covering over two centuries to examine the impact of the establishment of the US Federal Reserve on average US inflation and inflation uncertainty. We find that the founding of the Fed is associated with higher average US inflation and lower inflation uncertainty. Critically, these results are not driven by the post-1980 period, where the Fed policy is characterised by the dual mandate. Other important results are that the gold standard period is associated with both lower inflation and inflation uncertainty, and that banking and stock market crises are a positive determinant of inflation uncertainty and perhaps inflation. World Wars I and II and the US Civil War are associated with both higher inflation and higher inflation uncertainty. In addition, we find that the central bank has responded to increasing inflation uncertainty in a stabilising manner in support of the Holland hypothesis.

Inflación y volatilidad cambiaria en México (1969-2017)

Durante la década de los noventa, la economía mexicana experimentó diversos cambios en la aplicación de las políticas monetaria y cambiaria que culminaron con la implementación del esquema de metas de inflación en 2001. Si bien este régimen ha tenido éxito en la reducción de la tasa de inflación, también se ha observado un pobre desempeño económico. Este artículo de investigación busca examinar la relación entre inflación, incertidumbre inflacionaria y volatilidad cambiaria en un contexto de credibilidad, transparencia e independencia del Banco de México. Se utilizan modelos SARMA-GARCH, y su extensión E-GARCH-M, se presenta evidencia del cumplimiento de la hipótesis de estabilización de Holland y Friedman-Ball, lo que corrobora que el Banco de México ha procurado alcanzar su objetivo de inflación mediante una política de apreciación cambiaria y de disminución de su volatilidad.

Recent Developments in Macro-Econometric Modeling: Theory and Applications

Developments in macro-econometrics have been evolving since the aftermath of the Second World War.[...]

Forecasting Inflation Uncertainty in the G7 Countries

There is substantial evidence that inflation rates are characterized by long memory and nonlinearities. In this paper, we introduce a long-memory Smooth Transition AutoRegressive Fractionally Integrated Moving Average-Markov Switching Multifractal specification [ STARFIMA ( p , d , q ) - MSM ( k ) ] for modeling and forecasting inflation uncertainty. We first provide the statistical properties of the process and investigate the finite sample properties of the maximum likelihood estimators through simulation. Second, we evaluate the out-of-sample forecast performance of the model in forecasting inflation uncertainty in the G7 countries. Our empirical analysis demonstrates the superiority of the new model over the alternative STARFIMA ( p , d , q ) - GARCH -type models in forecasting inflation uncertainty.

Local/import – and foreign currency prices: inflation, uncertainty and pass through endogeneity

Abstract We investigate first and second order moment interactions among import prices (IPs), local currency prices (LCPs) and producer currency prices (PCPs) for 20 (mostly) developed economies and a time period of 3 decades. We test various hypotheses on both linear and non-linear effects put forth in the literature on the endogeneity of exchange rate pass through to monetary policy. It turns out that PCP shocks give rise to IP uncertainty in a sizeable manner, while the further propagation of IP uncertainty to LCP inflation uncertainty is moderate. Moreover, LCP inflation uncertainty increases the uncertainty of IP inflation (measured in local currency). In general, both inflation and its uncertainty are diagnosed as core determinants of pass through variation. Thus, a lack of monetary credibility could serve as a catalyst for the import of foreign price pressures and uncertainty to local prices.

INTERNATIONAL OUTPUT AND INFLATION UNCERTAINTY AND THEIR IMPACT ON COUNTRIES' MACROECONOMIC PERFORMANCE. EVIDENCE FROM A DYNAMIC FACTOR GARCH-IN-MEAN MODEL

We identify international output and inflation uncertainty and analyze their impact on individual countries' macroeconomic performance. Output and inflation uncertainty on an international level is measured through the conditional variances of common factors in inflation and output growth, estimated from a bivariate dynamic factor model with GARCH errors. The impact of international and country-specific uncertainty is analyzed by including the conditional variances as regressors. We find increases in uncertainty during the first and second oil crisis, the 1980s and 1990s recessions as well as the recent Great Recession to be confined to the international level. The effect of international uncertainty results to be highly significant and unambiguously negative on countries' output growth and inflation rates whereas the impact of country-specific uncertainty is very mixed.

Has the 2008 financial crisis and its aftermath changed the impact of inflation on inflation uncertainty in member states of the european monetary union?

AbstractWe study to what extent the financial crisis of 2008 and its aftermath have changed the impact of inflation on inflation uncertainty in the 12 original member states of the European Monetary Union (EMU). We adopt a time‐varying coefficient regression model with stochastic volatility effects, and extract two measures of inflation uncertainty from our data, namely, (1) The conditional volatility of inflation, (2) The conditional volatility of steady‐state inflation. (1)–(2) represent short‐run and steady‐state inflation uncertainty, respectively. The time‐varying impact of inflation on inflation uncertainty is analyzed using Markov‐switching regressions, where switching between the low and high inflation uncertainty regime is determined via an unobserved Markov process. Results suggest that the 2008 financial crisis and its aftermath have changed the impact of inflation on (1) and (2) across the selected EMU member states. However, a uniform pattern cannot be detected. For some member states, we document a strong link, whereas for others, the impact of inflation on inflation uncertainty is relatively weaker.