Inflation Uncertainty Research Articles

Corporate performance volatility and adverse macroeconomic conditions

PurposeThe purpose of this study is to empirically examine the extent to which volatility associated with corporate performance could be attributed to specific adverse macroeconomic conditions in a bivariate causality analysis.Design/methodology/approachThe study uses the Toda–Yamamoto Wald test approach to Granger causality analysis in verifying significant causal interactions if any, between corporate performance volatility and seven macroeconomic conditions or variables.FindingsThis study finds that economic policy uncertainty and macroeconomic uncertainty tend to have bidirectional causal interaction with corporate performance volatility. In addition, estimated results further suggest significant unidirectional causal interaction between corporate performance volatility and inflation expectations, exchange rate volatility, inflation and inflation uncertainty, with direction of causality running from the macroeconomic variables toward corporate performance volatility. This study, however, found no significant causal interaction between corporate performance volatility and recessionary probability or likelihood of recession.Practical implicationsThis study’s conclusions could have significant and critical policy implications for key corporate policymakers responsible for corporate performance strategy. Various causal interactions identified could inform policy framework and, subsequently, strategies geared toward minimizing volatility associated with performance during episodes of any of the various macroeconomic conditions examined in this study.Originality/valueThe uniqueness of this study stems from its focus on corporate performance volatility instead of corporate performance and potential causal interactions it might have with key adverse macroeconomic conditions, some of which have not been examined in previous studies according to reviewed literature.

Dynamic Linkages and Volatility Transmissions between Macroeconomic Uncertainty and Performance: Evidence from South Asian Countries

In this article, we examine the time-varying linkages and volatility transmissions between macroeconomic uncertainty and macroeconomic performance in four South Asian countries over the last 20–30 years. Through the lens of bivariate GARCH family models supplemented with two-step procedure, we arrive at several important conclusions. First, there is an overwhelming support for the Friedman–Ball hypothesis that higher inflation leads to inflation uncertainty in all countries. Second, Holland’s idea of negative influence of inflation volatility on the level of inflation holds only for one country (India). Third, there is no significant effect of macroeconomic uncertainty on the output growth in all countries under study, where real uncertainty induces inflation but impedes output growth, except in India. Fourth, output growth leads to decline real uncertainty in all countries except Sri Lanka and improves (reduces) inflation uncertainty in India (Bangladesh) only. Fifth, there is a statistically significant bidirectional causality between real and nominal uncertainties for at least half of the countries. Finally, there is an adverse effect of higher inflation on the output growth for Pakistan. We suggest that policymakers in these countries should pay more attention to expectations formation and should adopt dynamic monetary stabilization and inflation-targeting strategies, coupled with sustainable growth measures, for reducing macroeconomic volatilities.

The effects of transitory and permanent inflation uncertainty on investment in Ghana

We examined the effect of inflation uncertainty on domestic investment in Ghana using annual data for the period from 1963 to 2016. We decomposed inflation uncertainty into its transitory and permanent components in order to understand what component drives overall inflation uncertainty on investment. We found that, in the short run, while transitory inflation uncertainty affects investment in a differential manner, permanent inflation uncertainty affects investment negatively and insignificantly. The differential short-run effects of transitory inflation uncertainty on investment pass on to the long run as positive and significant effects. The negative short-run effect of permanent inflation uncertainty passes on to the long run insignificantly. Additionally, we found that total inflation uncertainty has differential short-run effects on investment, which passes on as negative and insignificant long-run effects. These results suggest that transitory inflation uncertainty tends to drive the differential short-run effects, while permanent inflation uncertainty drives the negative long-run effects. By decomposing uncertainty into transitory and permanent components, the overall dynamics of inflation uncertainty on domestic investment becomes clear. These findings are broadly consistent with the theoretical studies arguing that uncertainty may inhibit domestic investment. The findings suggest that counter inflationary policies should be more focused on moderating the volatility of inflation.

Time‐Varying Relationship between Inflation and Inflation Uncertainty

AbstractThis paper investigates whether the relationship between inflation and inflation uncertainty has changed and whether the change in this relationship has been gradual or abrupt. We extend the time‐varying parameter with stochastic volatility in mean model (TVP‐SVM) to include a mixture innovation disturbance in the time‐varying parameter process. The proposed model produces more reliable estimates and allows us to investigate the occurrence of breaks in the gradually evolving process of the time varying coefficients. Using data of US, Germany, Canada, New Zealand, UK, France, Italy, Spain and Australia, we find that: (i) the relationship between inflation and inflation uncertainty substantially varies over time; (ii) there is strong support for the existence of abrupt changes in the US inflation–inflation uncertainty relationship; (iii) our empirical results of Canada and New Zealand show that the correlation between inflation and inflation uncertainty has been much weaker since early 1990s, which coincides with the timing of the implementation of inflation targeting.

Inflation, Inflation Uncertainty, and Growth: Evidence from Ghana

Inflation and inflation uncertainty are critical factors influencing the functioning of markets and thus the efficient flow of economic activities. In this study, we investigated the effects of inflation and inflation uncertainty on growth in Ghana. Unlike the majority of the previous studies, we distinguished the short-run effects of inflation and inflation uncertainty on growth from the long-run effects. Also, unlike the previous studies, we examined whether increases in inflation uncertainty have the same effects on growth as decreases in it. By applying linear and nonlinear specifications to a data set covering the period 1963 to 2015, we found that inflation has both short and long-run negative effects on growth. Inflation uncertainty has a differential short-run effect and a negative long-run effect on growth. Increases in inflation uncertainty hurt growth, while decreases may reverse this pattern, albeit slowly. Both inflation and inflation uncertainty are critical determinants of growth in the country. To promote growth, policymakers should continue to pursue a low inflation target while ensuring minimal inflation uncertainty.

Assessing the uncertainty in central banks’ inflation outlooks

Recent research has found that macroeconomic survey forecasts of uncertainty exhibit several deficiencies, such as horizon-dependent biases and lower levels of accuracy than simple unconditional uncertainty forecasts. We examine the inflation uncertainty forecasts from the Bank of England, the Banco Central do Brasil, the Magyar Nemzeti Bank and the Sveriges Riksbank to assess whether central banks’ uncertainty forecasts might be subject to similar problems. We find that, while most central banks’ uncertainty forecasts also tend to be underconfident at short horizons and overconfident at longer horizons, they are mostly not significantly biased. Moreover, they tend to be at least as precise as unconditional uncertainty forecasts from two different approaches.

Inflation Anchoring, Real Borrowing Costs, and Growth: Evidence from Sectoral Data

Central bankers often assert that anchoring of inflation expectations and reducing inflation uncertainty are good for economic outcomes. We test this claim and search for a relevant channel using panel data on sectoral growth for 22 manufacturing industries from 36 advanced and emerging market economies over the period 1990-2014. Our difference-in-difference strategy is based on the theoretical prediction that inflation uncertainty has larger effects in industries that are more credit constrained by increasing effective real borrowing costs. The results show that industries characterized by high external financial dependence, low asset tangibility, and high R&D intensity tend to grow faster in countries with well-anchored inflation expectations. The results are robust to controlling for the interaction between these characteristics and a broad set of macroeconomic variables over the sample period, including the level of inflation and output volatility. The results are also robust to IV techniques, using indicators of monetary policy transparency and independence as instruments.

Measuring inflation uncertainty in Turkey

Measuring and monitoring inflation uncertainty is an essential ingredient of monetary policy analysis. This study constructs survey measures of inflation uncertainty for the Turkish economy. Using density and point inflation forecasts in the CBRT Survey of Expectations, we derive various uncertainty measures through standard deviation, entropy, and disagreement among forecasters. Our results suggest that survey-based inflation uncertainty measures are broadly consistent with market-implied indicators of inflation risk. Moreover, we find that an increase in observed inflation is associated with higher inflation uncertainty across all empirical specifications.

The Survey of the Asymmetric Effects of Inflation's Positive and Negative Shocks on Inflation Uncertainty in Iran Through the Extending Ball Model (1992)

The Survey of the Asymmetric Effects of Inflation's Positive and Negative Shocks on Inflation Uncertainty in Iran Through the Extending Ball Model (1992)

Inflación e incertidumbre inflacionaria en países selectos de América Latina

La presente investigación estudia la relación de retroalimentación entre inflación e incertidumbre inflacionaria, respecto a seis economías latinoamericanas, durante el periodo 1960-2018. La incertidumbrese calculó utilizando la volatilidad condicional estimada de modelos GJR-GARCH-M. Como principales conclusiones se obtuvieron: cumplimiento de la hipótesis de Friedman-Ball para la mayoríade las economías; comprobación de la hipótesis de Cukierman-Meltzer para Bolivia, México y Paraguay; identificación de un mayor impacto de los choques positivos en la incertidumbre inflacionaria y, finalmente, gracias a la adopción del régimen de metas de inflación (mi), evidencia empírica sobre que la volatilidaddisminuyó en las economías que implementaron dicho esquema

RATE OF COSTS ON INVESTMENT CAPITAL IN EMERGING MARKETS

To date, there is no adequate methodology for calculating the discount rate that would satisfy most financial analysts. The most common approach to determining the discount rate is to use the weighted average cost of capital (WACC) algorithm. The calculation of capital costs (discount rates) in emerging market countries (EM) is characterized by a number of problems related to the information inefficiency of the capital market, instability of demand for products, inflation, macroeconomic and legal uncertainty and a lack of proper payment discipline. Even more complex are the corresponding calculations during the financial crisis, accompanied by hyperinflation, a fall or significant fluctuations in the rate of the national monetary unit, trade wars, and the collapse of the banking system.Especially problematic for emerging markets is the calculation of the cost of equity (investment) capital. In developed markets, the classical CAPM model is used for these purposes. Taking into account the lack of an effective capital market in EM-related countries, it is quite difficult to determine the standard parameters of the model (risk-free rate of return, market risk premium, beta factor). Significant problems also lie in the sources and shadow schemes for paying high premiums for the risks of investing capital in EM. The aim of the paper is to substantiate recommendations on the procedure for calculating the rate of costs for own (investment) capital, taking into account the specifics of corporate activities in countries related to EM.

Measuring Inflation Anchoring and Uncertainty: A U.S. and Euro Area Comparison

AbstractWe use several U.S. and euro‐area surveys of professional forecasters to estimate a dynamic factor model of inflation featuring time‐varying uncertainty. We obtain survey‐consistent distributions of future inflation at any horizon, both in the U.S. and the euro area. Equipped with this model, we propose a novel measure of the anchoring of inflation expectations that accounts for inflation uncertainty. Our results suggest that following the Great Recession, inflation anchoring improved in the United States, while mild de‐anchoring occurred in the euro area. As of our sample end, both areas appear to be almost equally anchored.

Asymmetric Causality Between Inflation and Uncertainty: Evidences from 33 Developed and Developing Countries

Empirical studies have provided conflicting findings about the relationship between inflation and inflation uncertainty. Thus, the direction of the causality is still questionable. The present paper is aimed to extend the existing literature using non-linearity models and asymmetric causality tests. For this purpose, the data for 33 developed and developing countries during 1988Q4-2016Q3 is used. The results showed an asymmetry in the inflation behavior which is specified by smooth transition process, as well as separating positive and negative shocks observed in causality test. The asymmetric causality between inflation and inflation uncertainty is confirmed in most countries, although the empirical evidence in favor of Cukierman-Meltzer hypothesis is found to be weaker than Friedman-Ball hypothesis.

Quasi ex-ante inflation forecast uncertainty

We propose a measure of the effects of monetary policy based on an analysis of the distribution of the ex-post inflation forecast uncertainty. We argue that the difference between the distributions of the ex-ante and ex-post uncertainties reflects the impact of monetary policy decisions. Using the theoretical background of the New Keynesian model with imperfect information and a monetary policy rule, we derive a proxy for ex-ante inflation uncertainty called quasi ex-ante forecast uncertainty, which is free to a certain extent of the effects of monetary policy decisions. Furthermore, we introduce the compound strength measure of monetary policy, as well as the uncertainty ratio, which approximates the impact of monetary policy on the reduction of the inflation forecast uncertainty. Our empirical results show that the greatest policy effect in reducing the inflation forecast uncertainty occurs for countries which conduct either a well-established or a relatively pure inflation targeting policy.

Dollarization, Inflation Targeting, and Inflationary Dynamics in Ghana

ABSTRACTThe impact of dollarization on domestic economic performance, and the welfare implications of high inflation in an inflation targeting environment, have remained a matter of much concern for policymakers in recent years. This study investigates the effects of dollarization on inflation and inflation uncertainty in Ghana for the period January 1990 to December 2017. We apply the exponential Generalized Autoregressive Conditional Heteroskedasticity model together with impulse response and Granger causality tests to explore how dollarization affects the behavior of inflation for the pre-inflation targeting period (January 1990 – May 2007) and post-inflation targeting period (June 2007 – December 2017). The results indicate that dollarization has not played a significant role in the volatility of inflation in Ghana. Also, inflation Granger causes dollarization in both the pre- and post-inflation targeting regimes. Finally, there is a bidirectional causal relationship between inflation and inflation uncertainty following the adoption of inflation targeting monetary policy. We conclude that, although inflation targeting has not presented a significant impact on inflation volatility, it has affected the relationship between inflation and inflation uncertainty in Ghana. The dynamics of inflation volatility and asymmetries present crucial implications which are discussed to guide policymaking.

The Nexus Among Economic Growth, Inflation and Unemployment in Bhutan

In order to understand the dynamics of unemployment in Bhutan at a macro-level, this study has explored the association among economic growth, inflation and unemployment from 1998 to 2016. The autoregressive distributed lag (ARDL) model was applied to estimate the impact of economic growth and inflation on unemployment. The results of this empirical analysis suggest that economic growth had no impact on the reduction of unemployment rate in Bhutan both in the short and in the long run. In fact, as the economic growth increased, so did the unemployment rate. However, inflation had a negative association with unemployment rate in the short run and a positive association in the long run. In other words, an increase in the employment rate led to an increase in the inflation in the short run. Likewise, if inflation is not monitored or controlled, the uncertainty of inflation can lead to lower investment and lower economic growth, thereby causing unemployment to rise in the long run. This study, therefore, recommends policymakers to take into account the employment elasticity with respect to economic output and focus on sectors, which have more absorptive capacity in engaging the young labour market entrants. JEL: B22, C22, E24, E31

Estimating Trend Inflation Based on Unobserved Components Model: Is It Correlated with the Inflation Gap?

AbstractBuilding on the work of Stock and Watson (2007), this paper empirically shows that a negative correlation between innovations to trend inflation and the inflation gap plays an important role in the dynamics of postwar U.S. inflation. Additional features that we incorporate in our model include regime‐switching inflation gap persistence and association between inflation and inflation uncertainty. The resulting estimate of trend inflation is smooth, and our model provides superior out‐of‐sample forecasts than Stock and Watson's (2007) unobserved components model with stochastic volatility or than Atkeson and Ohanian's (2001) random walk model does.

Behavioral-Attention Phillips Curve: Theory and Evidences From Inflation Surveys

Abstract. I derive a theory of endogenous uncertainty and attention choice that can jointly account for two recent phenomena: (i) the flattening Phillips Curve and (ii) “well-anchored” inflation. In particular, I derive a Behavioral Attention Phillips Curve (BAPC) whose slopes on the output gap and inflation expectations decline when inflation is less uncertain. When inflation uncertainty is low, firms find it less costly to misperceive aggregate demand and inflation expectations, thus pay little attention to monetary shocks and change prices less. The dampened price response flattens the Phillips Curve. Inflation becomes more anchored with low uncertainty because costly attention motivates firms to rely more on “rules-of-thumb” such as the 2% inflation target. Using novel measures of inflation uncertainty constructed from surveys of inflation expectation, I show that the new Phillips Curve performs better both in-sample and out-of-sample than the traditional Phillips Curve with constant slope. Particularly, the BAPC does not generate the counterfactual prediction of large disinflation after the 2008-2009 Financial Crisis as does traditional Phillips Curves, resolving the Missing Disinflation Puzzle. I show that multiple equilibria arise with medium volatility due to the complementarity between pricing and attention choices. This gives rise to a novel policy paradox for the Central Bank and makes it hard to raise inflation in a quiet, low-volatility period.

Time–frequency relationship between US inflation and inflation uncertainty: evidence from historical data

AbstractWe provide new evidence on the relationship between inflation and its uncertainty in the United States on an historical basis, covering the period from 1775 to 2014. First, we use a bounded approach for measuring inflation uncertainty, as proposed by Chan et al. (2013), and compare the results with the Stock and Watson (2007) and Chan (2015) methods. Second, we employ the wavelet methodology to analyze the comovements and causal effects between the two series. Our results provide evidence of a relationship between inflation and its uncertainty that varies across time and frequency. First, we show that in the medium and long runs, the Freidman–Ball hypothesis holds with a bounded measure of uncertainty, while if the Stock and Watson (2007) measure of uncertainty is used, the Cukierman–Meltzer reasoning prevails. Therefore, the findings are sensitive to the way inflation uncertainty is computed. Second, we discover mixed evidence about the inflation–uncertainty nexus in the short run, findings that explain the mixed results reported to date in the empirical literature.

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.