Inflation Dynamics Research Articles

Cash transfers and the Phillips curve: The case of Brazil during the pandemic

This paper investigates the linear and nonlinear effects of the pandemic period on the dynamics of the Brazilian inflation through the estimation of a hybrid Phillips curve. Despite the undisputed socio-economic benefits, cash transfers paid by the government to low-income families increased inflation, with an estimated coefficient similar in magnitude to the output gap. The backward-looking component decreased while the forward-looking component increased sharply, suggesting a shift in the price-setting behavior toward anticipating fluctuations in the business cycle. There was also a significant reduction in the flatness of the Phillips curve, as the output gap coefficient more than doubled during this period. These findings might be explained by the unprecedented combination of sectorial increases in demand, a decrease in aggregate supply, anticipated money supply growth, and loose monetary policy. They unveil an undesired side effect of cash transfers on inflation that adversely affected the purchase power of the program beneficiaries.

On Waterfall's cryptoeconomic forecast

This work presents a system dynamics modeling approach to evaluate critical economic metrics on the Waterfall platform, a decentralized public network. The constructed model serves as a significant tool for understanding the intricate economic processes within the platform and supports informed decision-making by stakeholders. By using input parameters such as the number of network validators and transactions per second (TPS) over time, the model projects key metrics like the inflation rate and total supply of coins, providing insights into the platform's economic stability. The Waterfall platform is designed as a scalable smart contract ecosystem, underpinned by cryptoeconomics, to ensure a self- sustaining and self-regulating environment that maximizes stakeholder benefits. The platform's mainnet, launched in June 2024, has shown consistency between testnet results and theoretical calculations, demonstrating the robustness of the underlying economic model. However, as with any economic system, forecasting is essential for decision-making and improving efficiency. The system dynamics model allows for the exploration of different scenarios, considering various growth assumptions for validators and TPS, to project future economic conditions of the platform. Three scenarios – pessimistic, realistic, and optimistic – are considered, each with distinct growth trajectories for the number of validators and TPS. The outcomes highlight that while the initial stages of the network are characterized by high reward rates due to a smaller number of validators, these rates decline as more validators join, affecting the inflation rate over time. The relationship between the minting of new coins (as validator rewards) and the burning of transaction fees determines the system's inflationary dynamics. Under certain conditions, an increase in TPS could lead to deflation, enhancing the platform's economic sustainability. The results suggest that Waterfall's cryptoeconomic model has a strong potential for long-term stability and growth. The model's flexibility allows for adjustments based on real-time data and expert judgments, making it a valuable tool for both internal stakeholders and external analysts. This approach could also be applied to studying the cryptoeconomics of other decentralized networks, providing a broader understanding of their economic stability and long-term viability.

Dynamics of global energy, geopolitics, and climate policy on inflation: A cross-regional analysis

This study investigates the intricate dynamics between the Consumer Price Index (CPI) and three critical determinants—Global Price of Energy (GPE), Geopolitical Risk (GPR), and Climate Policy Uncertainty (CPU)—across Europe, the USA, and China from February 1992 to April 2023. Using advanced methodologies, including time-varying Granger causality tests and a connectedness approach, we reveal that CPI consistently acts as a net receiver of shocks. The Total Connectedness Index (TCI) demonstrates a persistent and evolving mutual influence among these variables. Geopolitical Risk is identified as a constant net transmitter of shocks, while the role of Global Price of Energy evolves over time, and Climate Policy Uncertainty shows variable interactions with CPI. Our pairwise directional connectedness analysis highlights GPR's dominant impact on CPI and unveils distinct patterns in the relationships between CPI and the other determinants. This comprehensive approach provides a detailed understanding of the temporal and directional dynamics of inflation, offering valuable insights for policymakers and scholars. These findings underscore the need for nuanced economic strategies to address inflationary pressures and inform future research on the complex interplay of global economic factors.

Greenflation, a myth or fact? Empirical evidence from 26 OECD countries

Among the various effects of the green transition on the macroeconomy, we examined the unintended effects of the green transition on inflation, the so-called “greenflation”. We analyzed panel data from 26 OECD countries covering the period from 2005 to 2019 using four models based on the New Keynesian Phillips curve model. To date, only a few studies have examined greenflation, particularly in terms of empirical investigation. The main contribution of this study to the literature is to provide empirical evidence of greenflation. We also provide empirical evidence on the issues in the NKPC literature that the output gap better explains inflation dynamics than unit labor costs and confirm the demise of the Phillips curve. Estimates from the Common Correlated Effect Mean Group (CCEMG), Augmented Mean Group (AMG), and Panel Corrected Standard Error (PCSE) models indicate that the green transition has an upward inflationary impact on headline inflation, but no significant impact on core inflation. In addition, we have examined four circumstances under which the green transition may affect inflation that have not been sufficiently discussed in the literature: increased green transition spending, carbon pricing, increased demand for critical minerals, and the low energy density of renewable energy. Each of these circumstances has the potential to exert both upward and downward pressures simultaneously. Our suggestion to policymakers is that they do not yet need to change their current view of monetary policy with respect to greenflation, but they should carefully consider policy designs that take into account the unintended effects of the energy transition.

Inflation and income distribution in Brazil from a Kaleckian perspective*

This article shows that income inequality and inflation in Brazil are multidimensional phenomena linked to the unemployment rate and to the foreign sector. Consequently, the relationship between inflation and income distribution depends on the source of inflationary pressures, as evident in the 2000 to 2020 period. This reflects significant differences in the dynamics of inflation in the tradable and non-tradable goods sectors and is consistent with the Kaleckian framework. Yet, a missing inequality puzzle is identified, suggesting that changes in the Industry sector’s relation with the foreign sector altered some of the relationships analyzed. The article also investigates the influence of the foreign sector on the intensity of the domestic distributive conflict in Brazil and discusses some implications of an intensified distributive conflict in terms of policies and regulations that alter the bargaining power of workers.

The New Keynesian Phillips Curve and r* ${r}^{* }$

AbstractIn this article, I argue that shifts in the natural rate of interest provide important insights for the New Keynesian Phillips Curve (NKPC). The deviation of the real interest rate from the natural interest rate (interest rate gap) captures the monetary policy stance, which is important for the dynamics of inflation and the output gap in the wake of persistent and permanent variation in the natural rate of interest. I present the evolution of the estimates of the Taylor‐rule consistent‐ natural interest rate, and thus the associated path of the expectations of future inflation via the Fisherian relationship. The path of these two variables has implications for estimation of the NKPC.

Gravitational wave signatures of post-fragmentation reheating

After cosmic inflation, coherent oscillations of the inflaton field about a monomial potential V(ϕ) ∼ ϕ k result in an expansion phase characterized by a stiff equation-of-state w ≃ (k-2)/(k+2). Sourced by the oscillating inflaton condensate, parametric (self)resonant effects can induce the exponential growth of inhomogeneities eventually backreacting and leading to the fragmentation of the condensate. In this work, we investigate realizations of inflation giving rise to such dynamics, assuming an inflaton weakly coupled to its decay products. As a result, the transition to a radiation-dominated universe, i.e. reheating, occurs after fragmentation. We estimate the consequences on the production of gravitational waves by computing the contribution induced by the stiff equation-of-state era in addition to the signal generated by the fragmentation process for k = 4,6,8,10. We find that the signal generated during the fragmentation process gives a larger contribution than the one induced by the stiff equation-of-state era in given frequency ranges for all values of k. Our results are independent of the reheating temperature provided that reheating is achieved posterior to fragmentation. Our work shows that the dynamics of such weakly-coupled inflaton scenario can actually result in characteristic gravitational wave spectra with frequencies from Hz to GHz, in the reach of future gravitational wave observatories, in addition to the complementarity between upcoming detectors in discriminating (post)inflation scenarios. We advocate the need of developing high-frequency gravitational wave detectors to gain insight into the dynamics of inflation and reheating.

Oil jump tail risk as a driver of inflation dynamics

In this paper, we look at the role of various oil jump tail risk measures as drivers of both U.S. headline and core inflation. Those measures are first computed from high-frequency oil future prices and are then introduced into standard regression models in order to (i) assess in-sample determinants of inflation, (ii) assess overtime the evolution of inflation drivers, (iii) estimate impulse response functions and (iv) forecast inflation out-of-sample for various horizons. Empirical results suggest that oil jump tail risk measures contain useful information to describe inflation dynamics, generally leading to upward inflationary pressures. Even after controlling from standard variables involved in a Phillips curve, goodness-of-fit measures show evidence of a gain, in particular for headline inflation. Overall, we observe that oil jump tail risk measures are contributing more to inflation dynamics since the Covid-19 crisis.

Disentangling demand and supply inflation shocks from electronic payments data

We propose a novel way to track inflation dynamics by identifying supply and demand shocks at a highly disaggregated level using electronic payments data. We estimate SVAR models and group historical decompositions at the product level into categories of the CPI. Our approach differs from others by explicitly estimating the shocks and retrieving their time-series dynamics. This information is valuable for monetary policy design, as it allows us to assess: (i) the type of shock driving any inflation category, (ii) whether shocks are generalized or driven by large shocks to specific items, and (iii) how the shocks evolve over time. An application to Chile suggests three distinct phases of inflation dynamics since COVID-19. In 2020, negative supply and demand shocks nearly offset each other. In 2021, demand shocks were boosted by massive liquidity injections. In 2022, global supply shocks introduced additional pressures on top of already elevated inflation.

Political Partisanship, COVID-19 Lockdown Policies, and Inflation Dynamics: Evidence from U.S. Metropolitan Areas

Political Partisanship, COVID-19 Lockdown Policies, and Inflation Dynamics: Evidence from U.S. Metropolitan Areas

Non-Linear Dynamics of Yield Spreads and Inflation: Evidence from India

Non-Linear Dynamics of Yield Spreads and Inflation: Evidence from India

Debt shocks and the dynamics of output and inflation in emerging economies

This paper empirically examines the impact of public debt shocks on output and inflation in 34 emerging market economies (EMEs), using panel local projections over the period 2000 to 2022. The estimated results show that real GDP falls significantly after an unanticipated increase in public debt while inflation rises. We also examine whether fundamental characteristics across EMEs could affect the impact of public debt shocks. The results also suggest nonlinearities in the dynamics, where higher initial debt levels, tighter domestic financial conditions, and lower income levels amplify the negative responses of real GDP, while tighter global financial conditions dampen the negative impacts of debt shocks. For inflation, the responses vary depending on economic-specific characteristics.

Cosmic inflation from fluctuating baby-Skyrme brane

In this work, we explore the inflationary dynamics induced by small fluctuations on the Skyrme brane, characterized by a time-dependent perturbative function ϕ̃. In the low-energy regime, the model successfully reproduces standard inflation, with a potential term dictated by the Skyrmion at the brane. Gravity localization is achieved at the brane, and the lowest energy scale is established at the asymptotic boundary. The model demonstrates the capability to emulate standard inflation dynamics, resembling ϕ̃4 potential characteristics under certain conditions. At higher energy regions, the behaviour of ϕ̃ is contingent upon the Skyrme term coupling constant λ, influencing reheating phases. The wave-like nature of fluctuations allows for energy transfer, resulting in a possibly lower reheating temperature. We also discuss the prospect of λ changing sign during inflation, presenting a non-standard coupling dependent on the matter field.

Understanding the international rise and fall of inflation since 2020

This paper analyzes inflation dynamics in 21 advanced and emerging market economies since 2020. We decompose inflation into core inflation as measured by the weighted median inflation rate, and headline shocks—deviations of headline inflation from core. Headline shocks occurred largely on account of energy price changes, although food price changes and indicators of supply chain problems also played a role. We explain the evolution of core inflation with two factors: the strength of macroeconomic conditions—measured by the unemployment gap, the output gap, and the ratio of job vacancies to unemployment—and the pass-through into core inflation from past headline shocks. We conclude that the international rise and fall of inflation since 2020 largely reflected the direct and pass-through effects of headline shocks. Macroeconomic conditions generally played a secondary role. In the United States, estimated price pressures from strong macroeconomic conditions had been greater than in other economies but have eased.

Energy shocks in the Euro area: Disentangling the pass-through from oil and gas prices to inflation

We develop a Bayesian Structural VAR model to study the relationship between different energy shocks and inflation dynamics in Europe. Specifically, we model the endogenous transmission from shocks identified by the global market of crude oil and the European natural gas market to two target macroeconomic variables, i.e. inflation expectations and realized headline inflation rate. Our results demonstrate that, since the post-pandemic recovery, inflation in the Euro area is mostly driven by energy price shocks and aggregate supply factors. In particular, the high peaks of the Eurozone inflation are mostly associated with natural gas supply shocks.

Strategic Inattention, Inflation Dynamics, and the Nonneutrality of Money

Strategic Inattention, Inflation Dynamics, and the Nonneutrality of Money

Pegged exchange rate regime and its impact on inflation in BRICS nations: Country-wise evidence

During the 1990s and 2000s, many developing nations accepted fixed exchange rate regimes to sustain price stability. By pegging their currencies to an anchor currency (i.e. US dollar), developing countries could bring credibility and confidence into their economies. The study tries to analyse the impact of the pegged exchange rate regime on inflation in BRICS countries for the period spanning from 2003 to 2022. The result points to the loss of monetary policy autonomy due to the ‘impossible trinity’ coming into play with a steady increase in capital inflows. The country’s large trade surpluses and extensive trade relationships may buffer the impact of exchange rate fluctuations on domestic prices, as changes in the exchange rate may be absorbed by changes in trade volumes or pricing strategies. Other factors like demographic trends or government interventions in markets could overshadow the influence of the exchange rate regime on inflation. The impact of changes in the exchange rate regimes on inflation may operate with lags, meaning that any effects may not be immediately observable in the data. The analysis in this study proposes that exchange rate regimes choice and money supply influence the inflation dynamics in the BRICS countries. It merely reflects the success of the central bank in neutralizing its very effort of maintaining the pegged rate, which gives rise to inflationary growth of the money supply.

Effects of supply chain bottlenecks and fiscal stimulus on inflation dynamics in the COVID-19 pandemic era: a case of South Korea*

ABSTRACT We employ an augmented New Keynesian Phillips curve, integrating a global supply chain bottleneck index and comprehensive fiscal stimulus packages, to quantitatively examine the impact of these variables on inflation rates in South Korea using monthly time-series data from 2010 to 2023. The results reveal three key findings. First, the Global Supply Chain Pressure Index (GSCPI), serving as a proxy for global supply chain bottlenecks, has an overall statistically insignificant effect on inflation throughout the observation period. However, during the pandemic, its effect on inflation was statistically significant. Second, the detrended government stimulus packages, proxied by government transfers or government fixed investment, also demonstrated a significant escalating effect on inflation during the pandemic. These findings suggest that both cost-push and demand-pull factors contributed to recent inflation surges. Third, conventional determinants of inflation, such as expected inflation, the domestic output gap, and crude oil prices, consistently influence inflation, aligning with existing literature.

Exchange rate and inflation dynamics in Kenya: Does the threshold level matter?

This study empirically examined the threshold effect of exchange rate pass-through (ERPT) on inflation in Kenya, while augmenting the exchange rate depreciation in the monetary policy rate using the Taylor rule. The monthly time series data spanning January 2005 to November 2023 was collected for analysis, in which the non-linear threshold autoregressive (TAR) model was employed as the main econometric model. This study's ERPT results reveal that, exchange rate depreciation has positive and significant effect on inflation only when it raises above the monthly threshold level of 0.51 %. In contrast, the Taylor rule analysis results reveal that the exchange rate depreciation has a positive and significant effect the monetary policy rate regardless of the threshold level of 0.67 %. Therefore, keeping domestic currency depreciation below a monthly growth rate of 0.51 % will control the pass-through effect on inflation, and the exchange rate depreciation at any level should always act as a reaction function for the monetary policy rate setting. This study also found that the relationship between exchange rate depreciation and inflation, as well as monetary policy rate is non-linear, which implies a greater pass-through effect when exchange rate depreciation is high. Therefore, we recommend the monetary authority in Kenya to pay attention to the depreciation of the exchange rate depreciation at any level when adjusting the policy rate to tame inflation.

Energy-related uncertainty shocks and inflation dynamics in the U.S: A multivariate quantile-on-quantile regression approach

Existing literature suggests that uncertainty shocks can propagate like aggregate demand shocks or aggregate supply shocks. By way of extension, this study investigates the effect of energy-related uncertainty shocks on U.S. inflation while incorporating the effect of industrial production and interest rate uncertainty shocks. Using a multivariate quantile-on-quantile regression for the period 2000:M6 to 2019:M7, the findings reveal that energy-related uncertainty shocks amplify inflation by manifesting as cost-push shocks with a stronger connection emerging in quantiles slightly above the median quantile distribution of energy-related uncertainty. Although industrial production positively drives inflation, its effect is observed less around median quantiles of inflation than in the lower and upper quantiles. Furthermore, the effect of interest rate uncertainty is negative and stronger in quantiles around the median of inflation, suggesting that interest rate uncertainty behaves like aggregate demand shocks. Based on these findings, policy implications are offered.