Inflationary Economies Research Articles

Inflation and west African sectoral stock price indices: An asymmetric kernel method analysis

Our work puts into perspective the relationship between inflation and West African sectoral indices between November 2001 and January 2020 using the asymmetric kernel method. The sectoral indices considered for the analysis include retail, finance, industry, utilities, agriculture, transportation, and other sectors. Our work reveals that while all sectors are sensitive to inflation, the utilities and agriculture sectors are more sensitive to changes in inflation. Moreover, we discover that the relationship between inflation and sectoral stock market indices is rather non-linear to support the hypothesis that the relationship between inflation and stock market indices varies across different inflationary economies. These results imply that investors modify the structure of their investment portfolio according to the variation in the levels of inflation to the extent that this variation ultimately affects future dividends.

Domestic price dollarization in emerging economies

This paper studies the dollarization of prices in retail markets of emerging economies. We develop a model of the firm’s optimal currency choice in retail markets in inflationary economies. We derive theoretical predictions regarding the optimality of dollar pricing, and test them using data from the largest e-trade platform in Latin America. Across countries, price dollarization is positively correlated with asset dollarization and inflation, and negatively correlated with exchange rate volatility. At the micro level, larger sellers are more likely to price in dollars, and more tradeable goods are more likely to be posted in dollars. We then show that the currency of prices determines the short-run reaction of both prices and quantities to a nominal exchange rate shock.

Default risk of wage-indexed payment mortgage in Turkey

This paper analyses default risk of wage-indexed payment mortgage (WIPM) in Turkey in comparison with other standard mortgage contracts originated in high inflationary economies. Emlak Bank launched WIPM linked to Civil Service employees’ wage (CSW) index during high inflationary period of late 1990s. Concurrently, the government introduced a policy linking CSW index to semi-annual expected rate of inflation in an attempt to facilitate housing finance for the fastest growing sector of the population. We find that WIPM protects borrowers against risk of high payment shocks whereas nominal contracts such as ARM and DIM would have resulted in high mortgage defaults.

Interest on reserves and inflation

The payment of interest on reserves has been a common practice in inflationary economies. This policy may seem paradoxical since it involves returning part of the seigniorage, generated by the inflation process, with the intention to finance the fiscal deficit. This paper argues that the motivation for this policy can be captured by the discretionary regime, where the policymaker pays interest on reserves because he is concerned with the erosion of real liquidity by inflation, which is in part beyond his control. However, this policy is an unlikely outcome in the commitment regime, where the policymaker is in full control of inflation.

THE DEVELOPING MORTGAGE MARKET IN TURKEY: THE KEY ISSUES IN THE CREATION OF THE SECONDARY MARKET

During the last decade, state-owned banks have dominated the housing finance market in Turkey. Emlak Bank has been the leading lender with investments in expanding housing credits. In 1998, Emlak Bank introduced the civil servants’ wage-indexed housing loan (WIHL) in order to facilitate housing finance for the middle-income population. In this study, the performance of the WIHL contract in comparison with the standard mortgages of inflationary economies is examined using data between 1998 and 2003. We find that WIHL is an innovative contract for the high inflation periods in Turkey as it provides insulation against highly volatile interest rates. However, recent years have witnessed moderate inflation, which has encouraged new developments in the housing finance sector. If stable economic conditions persist, mortgages of moderate inflationary environments can be originated safely for the long-term. An active primary mortgage market in conjunction with supportive government policies are essential elements for the creation of a secondary market, which would facilitate the long-term lending risk to be shared by private sector investors and governmentsponsored agencies.

Asymmetric effects of aggregate demand: An empirical test of a menu-cost model

We present a version of Ball and Mankiw's (1994) menu-cost macroeconomic model modified to allow for long-term growth and some elementary dynamics while preserving its characteristic predictions: that nominal demand shocks have non-linear and asymmetric output effects in inflationary economies. Tests using U.K. quarterly private sector data over the period 1955 to 1994 generally support the model's predictions.

A note on generality of the Cagan model for money demand

The generality of the Cagan model for money demand is questioned. Some high inflationary economies are hit by external shocks that may have a non-transitory effect on macroeconomic variables including consumer prices, high-powered money, or narrow money which are usually used in these studies. When a structural break exists, standard unit-root tests such as the augmented Dickey-Fuller test or Phillips-Perron test are biased in favour of accepting the hypothesis of non-stationarity. An alternative Perron's testing procedure, which includes dummy variables that recognize the possibility of exogenous changes in level or trend, was applied on high inflation plagued Yugoslavia and Mexico. Consumer price and money variables are in both cases stationary around a deterministic breaking trend function. Therefore, no cointegration between the variables exists and the Cagan model cannot explain the nature of inflationary processes in these countries. Alternative specifications are necessary.

Wheat and Value-Added Wheat Export Market Segmentation

The purpose of this study is to utilize economic and social development indicators to develop useful segments in the global market for wheat and value-added wheat exports. Developing segmented market profiles is necessary for marketing professionals to develop export market development strategies and apply them in appropriate locations. The techniques of factor and cluster analysis were applied to two different data sets, one for the wheat market and another for general agricultural imports. Complete data were obtained for 120 countries on 42 variables. The results revealed eight unique wheat export market clusters: high income developing countries, low income developing countries, trade based economies, middle income countries, Lesotho (unique by itself), high population wheat producers, inflationary economies and highly developed countries. There were no large differences, however, between the wheat export market clusters and those for general agricultural imports. Thus, the results may be generalized to other agricultural products with caution.

Investment in Inflationary Economies

The paper presents a model of irreversible investment under uncertainty, where investment takes place whenever a threshold level of marginal returns is reached. The threshold depends positively on price volatility; a change from high to low inflation induces an upward capital stock adjustment. In economies that move in and out of temporary stabilizations, the observed effect is a negative inflation-investment correlation that replicates previous empirical findings, due to purely short-term dynamics. I study how this correlation is affected by the expected duration of each regime. Empirical evidence from ten inflationary economies confirms the predictions of the model.

Investment in Inflationary Economies

The paper presents a model of irreversible investment under uncertainty, where investment takes place whenever a threshold level of marginal returns is reached. The threshold depends positively on price volatility; a change from high to low inflation induces an upward capital stock adjustment. In economies that move in and out of temporary stabilizations, the observed effect is a negative inflation-investment correlation that replicates previous empirical findings, due to purely short-term dynamics. I study how this correlation is affected by the expected duration of each regime. Empirical evidence from ten inflationary economies confirms the predictions of the model.

Genetic algorithms and inflationary economies

This paper studies overlapping generations economies in which agents use genetic algorithms to learn correct decision rules. The results of computer simulations show that a genetic algorithm converges to the unique monetary steady state in case of a constant money supply policy and to the low-inflation stationary equilibrium in case of a constant real deficit financed through seignorage. Features of the genetic algorithm adaptation are compared to the performance of other learning algorithms and to the behavior observed in experiments with human subjects in the same OLG environments.

The effects of inflationary finance on tax revenue under progressive tax regimes: An application to turkey, 1963–1982

The revenue from inflationary finance of government expenditures is enhanced because of the phenomenon of bracket-creep. Bracket-creep occurs in progressive tax systems because inflation pushes tax payers into higher tax brackets and thus increases the real tax revenue. In highly inflationary economies, the implicit revenue gain due to bracket-creep can be a significant source of revenue to the government. In the case of Turkey in 1963–1982, we find that government appropriated significant revenue due to bracket-creep, in addition to the revenue from inflationary finance.

THE EVOLUTION OF FINANCIAL STATEMENT INDEXATION IN BRAZIL

Accounting for inflation is one of the more controversial topics in financial reporting. This paper traces the evolution of the system of inflation accounting used in one of the most highly inflationary economies in the world—Brazil. The history of inflation accounting in Brazil (known as monetary correction) is divided into three time periods: pre-1964, 1964 to 1976, and 1976 to the present. The events pertinent to the system of monetary correction in each of these periods are first discussed and then evaluated. It is shown that the system of monetary correction has been subject to massive political pressures since its inception, but gradual improvements have taken place over the years.

Adjustments for Tax Purposes in Highly Inflationary Economies: Proceedings of a Seminar held in Buenos Aires in 1984 during the 38th Congress of the International Fiscal Association. Deventer & Boston: Kluwer Law and Taxation Publishers, 1985. Pp. 136 (paperbound).

Adjustments for Tax Purposes in Highly Inflationary Economies: Proceedings of a Seminar held in Buenos Aires in 1984 during the 38th Congress of the International Fiscal Association. Deventer & Boston: Kluwer Law and Taxation Publishers, 1985. Pp. 136 (paperbound). - Volume 13 Issue 5-6

Die optimale Transaktionskasse vom Typ M1 und M2

Abstract Optimal Type M1 und M2 Transaction Cash For a long time now, the quantity concepts M1 and M2 have been generally accepted in both the money quantity statistics of central banks and in money supply theory. The theory of the demand for money, however, has hardly been developed at all in this respect. The essay sets out to examine a special area of the theory of demand for money, namely that of transaction cash, and to derive the demand functions for money for transaction purposes for both M1and M2. The traditional literature on optimal determination of individual transaction cash (Baumol-Tobin) derives the optimal distribution of M2between M1(cash and demand deposits) and M2- M1(time deposits) satisfactorily, but starts out from a given stock of M2. One of the aims of the essay is to determine M2, which ıs interpreted as an alternative to the holding of goods by both households and firms. One important result arrived at by the study is that the demand for type Ma transaction cash is interest-inelastic and that the income elasticities dıffer for M1and M2. A second object of the study is to investigate the relationship between optimal transaction cash of types M1and M2and the inflation rate. Whereas in the case of inflation the demand for type M2is inversely related to the expected inflation rate, the decrease in type M1transaction cash results from two substitution effects: the rising cost of M1compared to time deposits on account of the rise in the nominal interest rate and the rising cost of M1compared to the holding of goods with a value equivalent to the expected inflation rate. This last case explains why “payment practices” (e.g. in inflationary economies) are not an “institutional” datum, but the result of economic choices.

Relative prices, income distribution and stabilization plans: The Argentine experience, 1967–1970

The objective of this paper is to analyze the anti-inflationary plan applied in Argentina in 1967, a plan which did not eliminate inflation. With respect to the failure of this plan, two different explanations have been offered: one according to which the problems were essentially political, and another, which maintained the program contained basic technical flaws. From the analysis of this paper it is clear that the truth lies much closer to the second explanation. In the last section of the paper, economic policy recommendations relevant for future anti-inflationary plans, be they implemented in Argentina or in other inflationary economies, are presented.