Inflation Bias Research Articles

Monetary Policy, Employment Shortfalls, and the Natural Rate Hypothesis

Activity shortfalls are more costly than strong activity. I consider optimal monetary policy under discretion with an asymmetric (activity shortfalls) loss function. The model satisfies the natural rate hypothesis. The asymmetric loss function and resulting optimal monetary policy exacerbates shortfalls in activity. The additional frequency of activity shortfalls arises from the adjustment of expectations implied by the natural rate hypothesis. The shortfalls asymmetry leads to an inflationary bias, similar to results in the time-consistency literature. Mandating a central bank objective with greater symmetry than the social loss function improves outcomes. Greater symmetry lowers the magnitude of activity shortfalls. Greater symmetry also reduces inflation bias. The model also implies that an optimal monetary policy does not accommodate fluctuations from aggregate demand shocks, as is standard in such models. As a result, the analysis implies that monetary accommodation of strength in economic activity likely requires justifications other than asymmetric costs of shortfalls.

Signalling with Private Monitoring

Abstract We study dynamic signalling when the sender does not see the signals that her actions generate. The sender then uses her past play to forecast what a receiver believes, in turn forcing the receiver to forecast the previous forecast, and so forth. We identify a class of linear-quadratic-Gaussian games where this endogenous higher-order uncertainty can be handled. The sender’s second-order belief is key: it is a private state that she controls, and it creates a new channel for information transmission. We examine the role of higher-order uncertainty and this new signalling channel in applications to macroeconomics, reputation, and trading: inflationary biases under discretion can be larger; career-concerned agents may benefit from not knowing their reputations; and informed trades can carry more price impact. We also introduce an existence method for boundary value problems that can be used in other dynamic games.

GWABLUP: genome-wide association assisted best linear unbiased prediction of genetic values

BackgroundSince the very beginning of genomic selection, researchers investigated methods that improved upon SNP-BLUP (single nucleotide polymorphism best linear unbiased prediction). SNP-BLUP gives equal weight to all SNPs, whereas it is expected that many SNPs are not near causal variants and thus do not have substantial effects. A recent approach to remedy this is to use genome-wide association study (GWAS) findings and increase the weights of GWAS-top-SNPs in genomic predictions. Here, we employ a genome-wide approach to integrate GWAS results into genomic prediction, called GWABLUP.ResultsGWABLUP consists of the following steps: (1) performing a GWAS in the training data which results in likelihood ratios; (2) smoothing the likelihood ratios over the SNPs; (3) combining the smoothed likelihood ratio with the prior probability of SNPs having non-zero effects, which yields the posterior probability of the SNPs; (4) calculating a weighted genomic relationship matrix using the posterior probabilities as weights; and (5) performing genomic prediction using the weighted genomic relationship matrix. Using high-density genotypes and milk, fat, protein and somatic cell count phenotypes on dairy cows, GWABLUP was compared to GBLUP, GBLUP (topSNPs) with extra weights for GWAS top-SNPs, and BayesGC, i.e. a Bayesian variable selection model. The GWAS resulted in six, five, four, and three genome-wide significant peaks for milk, fat and protein yield and somatic cell count, respectively. GWABLUP genomic predictions were 10, 6, 7 and 1% more reliable than those of GBLUP for milk, fat and protein yield and somatic cell count, respectively. It was also more reliable than GBLUP (topSNPs) for all four traits, and more reliable than BayesGC for three of the traits. Although GWABLUP showed a tendency towards inflation bias for three of the traits, this was not statistically significant. In a multitrait analysis, GWABLUP yielded the highest accuracy for two of the traits. However, for SCC, which was relatively unrelated to the yield traits, including yield trait GWAS-results reduced the reliability compared to a single trait analysis.ConclusionsGWABLUP uses GWAS results to differentially weigh all the SNPs in a weighted GBLUP genomic prediction analysis. GWABLUP yielded up to 10% and 13% more reliable genomic predictions than GBLUP for single and multitrait analyses, respectively. Extension of GWABLUP to single-step analyses is straightforward.

Unconventional policy instruments in the New Keynesian model

Abstract This paper analyzes the use of unconventional policy instruments in New Keynesian setups in which the “divine coincidence” breaks down. The paper discusses the role of a second instrument that, in addition to the effect of conventional interest rate policy, may enter the Phillips curve, the investment–saving (IS) curve, and the welfare function, thus influencing inflation and output. The paper presents theoretical results on equilibrium determinacy, the inflation bias, the stabilization bias, and the optimal central banker’s preferences when both instruments are available. We show that the use of an unconventional instrument reduces the zone of equilibrium indeterminacy and may reduce the volatility of the economy. However, in some circumstances, committing to not use the second instrument may be welfare-improving (a result akin to Rogoff (Journal of International Economics 18(3-4), 199–217, 1985) example of counterproductive coordination). We also show that the optimal central banker should be both aggressive against inflation and interventionist in using the unconventional policy instrument, and we analyze the optimal central banker’s preferences when social preferences would yield equilibrium indeterminacy.

COVID-19 inflation weights in the UK and Germany

The COVID-19 pandemic altered consumption patterns significantly in a short period of time. However, official inflation statistics take time to reflect changes in the weights of the CPI consumption basket. Using credit card data for the UK and Germany, we document how consumption patterns changed and quantify the resulting inflation bias. We find that consumers experienced a higher level of inflation at the beginning of the pandemic than what a fixed-weight inflation (or the official-weight) index suggests and lower inflation thereafter. We also show that weights can differ among age groups and in-person vs. online spenders. These differences affect the purchasing power of the population heterogeneously. We conclude that CPI inflation indexes based on frequently updated weights can provide useful inputs to assess changes in the cost of living, including across segments of the population. If shifts in consumption patterns prove persistent, these indexes can help determine the need to introduce new weights and inform monetary policy and the design of support policies for the more vulnerable.

Preventing bank panics: The role of the regulator's preferences

AbstractHow do the preferences of a banking authority affect its decision making in periods of distress and thus financial stability? We study this question in a version of Diamond and Dybvig (1983) with a monopolistic bank and a time‐consistent policy response by a banking authority. We show that limited commitment on the part of the banking authority may induce fragility but the banking authority's incentives are also an important determining factor in the degree of financial stability. In particular, under a simple suspension scheme, delegating a banking authority who places sufficient weight on a banker's welfare acts as a commitment device and prevents runs, in analogy with how a Rogoff (1985) “conservative” central banker helps reduce inflation bias. In contrast, once interventions take the form of payment rescheduling, the scope for the bank's susceptibility to a panic increases should the banking authority put more weight on monopoly rents. Identifying such an aspect of vulnerability suggests that appointing a banking authority whose objective function deviates from that of depositors may have unintended consequences.

What Is in a Name? Purchases and Sales of Financial Assets as a Monetary Policy Instrument

AbstractThis paper studies optimal interest rate and balance sheet policy in a quantitative New Keynesian model with a constrained financial sector, considering commitment versus discretion in monetary policy design and fixing either instrument. Optimal interest rate policy under commitment (discretion) achieves 93.0% (82.6%) of the potential gains to dual instrument monetary policy under commitment. Optimal discretionary dual instrument policy eliminates the cost of commitment limitations and exhibits no inflationary bias. Under commitment, the optimal balance sheet policy eliminates the cost of suboptimal interest rate policy, for example, an interest rate peg. Finally, I compare optimal policies to implementable rules‐based policies.

Monetary Policy and Sovereign Debt Sustainability

Abstract We analyze the consequences of monetary policy for sovereign debt sustainability and welfare in a model of a small open economy where the government issues long-term nominal debt without a commitment not to default on it or erode its real value through (costly) inflation. Inflation is a form of partial default, one that is more state-contingent than outright default. This reduces the government’s incentives to default outright and hence enlarges the repayment region, compared to a regime in which debt cannot be inflated away. Moreover, inflation delivers sizable welfare gains in situations of sovereign debt stress, in which its benefits as a debt-stabilizing tool are larger. Over the longer run, however, the welfare gains from inflation are more modest, because the inflationary bias leads the government to create inflation also in situations in which it is less useful for debt-stabilization purposes.

The General Growth Tendency: A tool to improve publication trend reporting by removing record inflation bias and enabling quantitative trend analysis.

The trend of the number of publications on a research field is often used to quantify research interest and effort, but this measure is biased by general publication record inflation. This study introduces a novel metric as an unbiased and quantitative tool for trend analysis and bibliometrics. The metric was used to reanalyze reported publication trends and perform in-depth trend analyses on patent groups and a broad range of field in the life-sciences. The analyses confirmed that inflation bias frequently results in the incorrect identification of field-specific increased growth. It was shown that the metric enables a more detailed, quantitative and robust trend analysis of peer reviewed publications and patents. Some examples of the metric’s uses are quantifying inflation-corrected growth in research regarding microplastics (51% ± 10%) between 2012 and 2018 and detecting inflation-corrected growth increase for transcriptomics and metabolomics compared to genomics and proteomics (Tukey post hoc p<0.0001). The developed trend-analysis tool removes inflation bias from bibliometric trend analyses. The metric improves evidence-driven decision-making regarding research effort investment and funding allocation.

Institutional Arrangements and Inflation Bias: A Dynamic Heterogeneous Panel Approach

AbstractThe paper investigates whether the institutional arrangements that determine the conduct of monetary and prudential policies influence policymakers' actions in pursuing their designated mandates. Employing recently developed dynamic heterogeneous panel methods and using data for 25 industrialized countries from 1960 to 2018, we empirically assess whether central banks' main objective of inflation stability is compromised when assigned with both policy mandates manifested as inflation bias. Our results show that, once we appropriately control for relevant policy and institutional factors, the separation of macroprudential regulation and monetary policy does not have a significant effect on inflation outcomes.

A Note on Time Inconsistency and Endogenous Exits from a Currency Union

This paper investigates the effects of members’ exits from a currency union on the credibility of the common currency. In our currency union model, the inflation rate of the common currency is determined by majority voting among N member countries that are heterogeneous with respect to their output shocks. Once an inflation rate of the common currency has been selected, each member decides whether to remain in the currency union or not. If a member decides to exit, it has to pay a fixed social cost and individually chooses the inflation rate of its currency. Unlike previous research on this topic, we focus on the possibility of achieving an optimal outcome, which generates no inflation bias, when more than one member is expected to leave the currency union. We show that the optimal outcome can only be achieved if no members leave the currency union.

The COVID-19 Inflation Weighting in Israel

Abstract Significant shifts in the composition of consumer spending as a result of the COVID-19 crisis can complicate the interpretation of official inflation data, which are calculated by the Central Bureau of Statistics (CBS) based on a fixed basket of goods. We focus on Israel as a country that experienced three lockdowns, additional restrictions that significantly changed consumer behavior, and a successful vaccination campaign that has led to the lifting of most of these restrictions. We use credit card spending data to construct a consumption basket of goods representing the composition of household consumption during the COVID-19 period. We use this synthetic COVID-19 basket to calculate the adjusted inflation rate that should prevail during the pandemic period. We find that the differences between COVID-19-adjusted and CBS (unadjusted) inflation measures are transitory. Only the contribution of certain goods and services, particularly housing and transportation, to inflation changed significantly, especially during the first and second lockdowns. Although lockdowns and restrictions in developed countries created a significant bias in inflation weighting, the inflation bias remained unexpectedly small and transitory during the COVID-19 period in Israel.

A disaster always rings twice: Early life experiences and central bankers' reactions to natural disasters

AbstractWe analyze the impact of natural disasters experienced in the early life of central bankers to assess their reaction to present‐day similar events. We use a panel dataset covering 68 (developed and developing) countries, for the period 2000 Q1 to 2017 Q4, to examine how the very‐short‐run dynamics of inflation is affected by the (actual) natural disasters, and how past experiences affect the immediate reaction of central bankers to these shocks. Our results reveal that the effect of early‐life experiences is significant: central bankers who have been exposed to disasters in early life tend to manage inflation in a more conservative way in the very‐short‐run. The effect disappears over the course of one year, and central bankers with superior voting power have a larger influence on outcomes. Younger central bankers are more conservative than older ones, which may reveal that the early‐life disasters' impact decays over time. The European Central Bank (ECB) appears immune to such influences, in conformity with expectations given the ECB's federal architecture and the size of the area it administers. The behavior revealed by our results thus signifies that central banks tend, on average to avoid any inflationary bias, inducing that the long‐run impact of a disaster suffered in the formative years of an individual can bring socially positive consequences, when such an individual becomes governor of her country's central bank.

MANAGEMENT OF INNOVATIVE ACTIVITIES: FORMATION OF ALTERNATIVE SOURCES OF UKRAINIAN ENTERPRISE DEVELOPMENT

Introduction. The subject of the research is the mechanisms of innovative enterprises’ activity, its activation, and improvement of effectiveness. The financial support of business entities’ innovative activity sources is considered. The structure of financing innovation activities volumes and dynamics in Ukraine are analyzed. Possibilities of expansion of own enterprises’ financial resources and the possibility of introducing and using unconventional sources of sponsorship of innovative business – leasing financing are highlighted. The purpose and objective of the research are to systematize the internal alternative sources of funding that ensure innovative enterprise development and formulate proposals for improving the practice of their use. Method (methodology). The approach of the systems, methods of analysis and synthesis, is applied; as the informative basis of used normatively-legal base and current data of Government service of statistics of Ukraine. Results. In the variety of aspects of the problem study, the innovative process basic attention applies to the objective-subject structure of the innovative enterprise. As for the mechanisms of providing innovative activity, its activation, and increase of efficiency, these questions are not enough worked out. In the conditions of limited nature: budgeting; own sources for the realization of innovative activity; high-interest credit rates; inflationary biases the problem of search of sourcing purchased today the special sharpness and needs realization of complex researches in this direction. The special value gathers the research in the area of alternative internal sources of funding to provide innovative processes, one of which is financial leasing. The economic importance of financial leasing consists in providing capital for investment and allowing operatively to settle the problems of long-term innovations’ investment. However, today a leasing market, in our country, needs reformation and perfection, in particular through updating its regulation model. The recommendations in the article contribute to the improvement of the legal management framework for innovative activities of Ukrainian enterprises at the stage of leasing relationship implementations.

Intermediate Commitment, Temptation, and Central Banks

Traditionally, models of central banks assume they either ignore past constraints (discretion) or completely integrate them (commitment) into today's decision making. I show how the temptation to ignore the past can be taken seriously to produce intermediate behavior. I ground the analysis in micro-theoretic treatment of temptation for a two-period model. Then, I develop an extension of recursive contracts that accommodates a broad class of intermediate decision-making processes. Next I develop a particular example of scaled commitment. It can model central banks succumbing to stabilization bias after the zero lower bound, but resisting inflation bias. Finally, I provide a general derivation of the recursive approach for any problem with a forward-looking constraint.

A Promised Value Approach to Optimal Monetary Policy*

AbstractThis paper characterizes optimal commitment policy in the New Keynesian model using a recursive formulation of the central bank's infinite‐horizon optimization problem in which promised inflation and output gap – as opposed to lagged Lagrange multipliers – act as pseudo‐state variables. Our recursive formulation is motivated by (Kydland, F. and Prescott, E. C. (1980). Journal of Economic Dynamics and Control Vol. 2, pp. 79–91). Using three well‐known variants of the model – one featuring inflation bias, one featuring stabilization bias and one featuring a lower bound constraint on nominal interest rates – we show that the proposed formulation sheds new light on the nature of the intertemporal trade‐off facing the central bank.

Inflation Target Zones as a Commitment Mechanism

In a simple new keyenesian model of monetary policy under discretion constraining the Central Bank to put inflation within a pre-specified Inflation Target Zone can eliminate the inflation bias and, at least for certain parameter ranges, significantly reduce the stabilization bias. Also, it is possible to investigate what is the optimal Inflation Target Zone for different economies. These seem to depend of the structural parameters in a non-linear and often non-monotonic way.

A study on the dynamics between the moral reasoning process and celebrity image and their impact on consumers’ support for celebrity comebacks after a transgression

A study on the dynamics between the moral reasoning process and celebrity image and their impact on consumers’ support for celebrity comebacks after a transgression

Inflation-default trade-off without a nominal anchor: The case of Greece

We investigate the debt sustainability implications of leaving a currency union in the context of the Grexit phenomenon. Using a common currency debt specification that is calibrated to the 2001-2010 episode of the Greek economy, we obtain default in year 2012 as an endogenous outcome in a baseline event analysis. Next, we consider a Grexit scenario in which the government issues both euro and drachma denominated sovereign debt and has the option to inflate away its nominal debt obligations by discretion. In the Grexit economy, lenders charge an ex ante inflation risk premium while buying drachma debt with the anticipation of an ex post inflationary bias. Consequently, in order to obtain drachma debt shares that are representative of the Greek economy in the pre-eurozone episode, we assume that the sovereign now borrows in segmented bond markets and the inflation risk premium on drachma debt is counterbalanced by a risk aversion premium asked by lenders of euro debt. We find that outright default would be avoided in 2012 if drachma was announced as a national currency. However, despite default is avoided, the aversion premium on euro debt shrinks the revenue raised by debt issuance in large amounts and reduces welfare.

Optimal Time-Consistent Monetary, Fiscal and Debt Maturity Policy

The textbook optimal policy response to an increase in government debt is simple—monetary policy should actively target inflation, and fiscal policy should smooth taxes while ensuring debt sustainability. Such policy prescriptions presuppose an ability to commit. Without that ability, the temptation to use inflation surprises to offset monopoly and tax distortions, as well as to reduce the real value of government debt, creates a state-dependent inflationary bias problem. High debt levels and short-term debt exacerbate the inflation bias. But this produces a debt stabilization bias because the policy maker wishes to deviate from the tax smoothing policies typically pursued under commitment, by returning government debt to steady-state. As a result, the response to shocks in New Keynesian models can be radically different, particularly when government debt levels are high and maturity short.