Path Of Inflation Research Articles

Default and Determinacy Under Quantitative Easing

We show that the path of inflation under quantitative easing policies that target interest rates, is determitate in the presence of default. We achieve this through different payoff profiles that a collateralised defaultable bond achieves in different states of nature with distinct default outcomes. In the model, heterogeneous households trade this bond and other shorter maturity risk-free bonds to maximize their intertemporal utility of consumption and labour. The differentiated payoffs of the collateralised bond, in an equilibrium with active default, span the full state space giving determinacy of prices and inflation as an outcome. This, implies that quantitative easing like the one implemented by the ECB in the recent years, can control the stochastic path of inflation.

Currency Substitution under Transaction Costs

We consider a setting where agents can choose between two currencies to conduct their goods purchases. The usage of either currency comes with currency-specific transactions costs. For example, purchasing some goods with cryptocurrencies rather than dollars is easier and may avoid taxes. We explore an extension of Schilling-Uhlig (2019), allowing for asymmetry in transaction costs as well as dollar-bitcoin exchange fees. Agents alternate in their role as buyers and sellers, necessitating currency. A central bank steers the dollar inflation path, while bitcoins are in fixed supply. We characterize the nonstochastic equilibrium and the resulting exchange rate dynamics.

Inflation Dynamics In A Small Developing Economy: An Empirical Analysis for Ghana

Monetary policy over the data period is aimed at sustaining the growth in the money supply achieved through a tight monetary policy stance, thereby ensuring price and exchange rate stability. This paper aims to empirically examine the share of exchange rate pass-through and local monetary targets in explaining inflation dynamics in Ghana. Annual data is obtained from International Financial Statistics, Organization for Economic Cooperation and Development, and Bank of Ghana’s Annual Reports. The aggregate time series used in the estimation are money (broad money supply, M2, defined as currency plus demand, time and savings deposits held by the public), real income per capita, and the real effective exchange rate. The UK consumer Price index is used as a proxy for the foreign price level since the UK has been Ghana’s largest trading partner over much of the data period. The Treasury bill rate is used as the domestic nominal rate of interest. The Consumer Price Index measures the domestic price level. Using Pesaran, Shin and Smith’s bounds testing approach to cointegration and an error correction model, the paper finds empirical evidence for both short and long run inflationary consequences from changes in monetary factors. The results indicate that changes in money supply, real effective exchange rate, nominal interest rate, real income per capita and foreign prices have a significant influence on the behavior and path of inflation in the long run. However, the short-run dynamics based on an error correction model shows that money supply has no significant impact on the rate of inflation. While real effective exchange rate and nominal interest rate have significant effects, the main driving force behind domestic inflation in the short-run appears to be import prices and real income per capita. The findings highlight the need for an alternative operational target such as the monetary conditions index or an explicit inflation-targeting framework to improve policy credibility.

How Inflation Affects the Management Earnings Forecasts

I use 2005-2017 Shenzhen and Shanghai’s A-share listed company’s quarterly earnings forecasts data as sample to perform multiple regression analysis. I find that when inflation rate rises, not only management’s possibility of making earnings forecasts but also the precision and accuracy of management forecasts declines, ceteris paribus. Furthermore, I also find that when inflation rate rises, the state-owned nature of enterprises will aggravate the decline in the precision and accuracy of listed companies’ earnings forecasts. In the unique context of semi-mandatory disclosure rules in China, if companies voluntarily disclose more performance-related information, it usually means that the managers are more capable, more confident. Therefore, this voluntary behavior can alleviate the decline in the precision and accuracy of the earnings forecast brought by inflation. Finally, I find that the precision and accuracy of the earnings forecasts will further decline for companies with higher debt ratios, indicating that liabilities may be one of the paths of inflation affecting voluntary information disclosure.

Money, Exchange Rate, Prices and Output in Nigeria: A Test of the P-Star Model

<p><em>The search for robust model to predict inflation within a QTM framework gave birth to P-star model which has attracted less attention of researchers and practitioners in Nigeria. This study applied the methodology to high frequency Nigerian data from 1995M1 to 2018M6 to determine the validity of the model for Nigeria using error correction model (ECM). The result supports the working of the model but with slight modification. The modification centres on the incorporation of foreign price gap, (open economy view of inflation), reserve money (Friedmanic/monetarist view), price per litre of petroleum motor spirit (PMS) and output gap (Structuralist view). With this modification, P-star model proved to be a viable inflation forecasting alternative model for Nigeria. Consequently, the Central Bank of Nigeria is advised to consider adopting this modified version of the model to forecast inflation for Nigeria at least as a complimentary model to be used side-by-side with the existing forecasting model of the Bank. This will no doubt enhance the efficacy of the monetary policy of the Bank as such policies will be predicated on sufficient information, particularly on the future path of inflation.</em></p>

Symmetry breaking during inflation of a toroidal membrane

Membrane structures with symmetry often exhibit geometric instability under finite inflation. We observe and study this phenomenon in the case of a flat toroidal membrane with axisymmetry and reflection symmetry. The membrane is modeled as a Mooney-Rivlin hyperelastic material. The stability of the symmetric inflation path is studied perturbatively which reveals a zone of instability. Using higher order perturbation, the asymmetric shape is subsequently determined. As the inflation proceeds, first the axisymmetry is broken spontaneously through a supercritical pitchfork bifurcation, and is later restored at a reverse subcritical pitchfork bifurcation. The extent of the symmetry breaking zone depends on the material and geometric parameters of the toroidal structure. It is found that a stout torus can completely eliminate the occurrence of such symmetry breaking bifurcations on its inflation path.

Dynamic monetary equilibrium with a Non-Observed Economy and Shapley and Shubik’s price mechanism

We build a general equilibrium model with inside and outside money, heterogeneous tax-evading households, a government and a central bank to demonstrate the dynamic nature of the relationship between inflation rates as a monetary policy and the size of the Non-Observed Economy. Using Shapley and Shubik’s (1977) price mechanism, we show that fiat money has a positive value in a unique monetary equilibrium where formal and informal markets coexist. In this model, with forward-looking agents and a government that has long term budget constraint, inflation is not only a tax but is also a debt, revealing yet another interpretation of the Ricardian effect. The model is capable of producing both positive and negative relationships between the change in the inflation rate and the size of the Non-Observed Economy, both over time and across countries. In this setting, the Non-Observed Economy plays a role of a “friction”, allowing monetary policy to have real effects, as commodity allocation between government and private consumption depends on the inflation path.

Perils of unconventional monetary policy

Unconventional monetary policy, by relaxing restrictions on the composition of the balance sheet of the central bank, compromises control over the stochastic path of inflation; or, in open economies, over the stochastic path of exchange rates. If the composition of the balance sheet is unrestricted then the path of inflation is indeterminate. This is the case under pure quantitative easing, where the target is the size of real money balances. In contrast, credit easing policies restrict the composition of the portfolio by targeting a specific expansion in the maturity profile of bonds bought, and thus can implement a determinate path of inflation. The composition of the portfolios traded by monetary-fiscal authorities also determines premia in asset and currency markets.

Inflation Dynamics in Algeria

In thispaper, we analyze Inflation Dynamics in Algeria between 2002 and 2016. We use a Vector Auto Regressive model (VAR), impulse response functions (IRF) and variance error decomposition (VDC) to uncover possible links between public spending component sand inflation. Wetest for the sources and dynamics of inflation in Algeria by focusing on public spending, since they are expected to exert a strong influence on the aggregate demand and hence inflation. According to the results we found, inflation in Algeria is persistent; shocks are lasting longer and having impact on the future inflation path. Social transfers and equipment spending are found to be the most contributing components of public spending in explaining inflation in Algeria.

Inflation Dynamics in Algeria

In thispaper, we analyze Inflation Dynamics in Algeria between 2002 and 2016. We use a Vector Auto Regressive model (VAR), impulse response functions (IRF) and variance error decomposition (VDC) to uncover possible links between public spending component sand inflation. Wetest for the sources and dynamics of inflation in Algeria by focusing on public spending, since they are expected to exert a strong influence on the aggregate demand and hence inflation. According to the results we found, inflation in Algeria is persistent; shocks are lasting longer and having impact on the future inflation path. Social transfers and equipment spending are found to be the most contributing components of public spending in explaining inflation in Algeria.

A Macroeconomic Approach to the Term Premium

In recent years, term premia have been very low and sometimes even negative. Now, with the United States economy growing above potential, inflationary pressures are on the rise. Term premia are very sensitive to the expected future path of growth, inflation, and monetary policy, and an inflation surprise could require monetary policy to tighten faster than anticipated, inducing to a sudden decompression of term and other risk premia, thus tightening financial conditions. This paper proposes a semi-structural dynamic term structure model augmented with macroeconomic factors to include cyclical dynamics with a focus on medium- to long-run forecasts. Our results clearly show that a macroeconomic approach is warranted: While term premium estimates are in line with those from other studies, we provide (i) plausible, stable estimates of expected long-term interest rates and (ii) forecasts of short- and long-term interest rates as well as cyclical macroeconomic variables that are stunningly close to those generated from large-scale macroeconomic models.

A Macroeconomic Approach to the Term Premium

In recent years, term premia have been very low and sometimes even negative. Now, with the United States economy growing above potential, inflationary pressures are on the rise. Term premia are very sensitive to the expected future path of growth, inflation, and monetary policy, and an inflation surprise could require monetary policy to tighten faster than anticipated, inducing to a sudden decompression of term and other risk premia, thus tightening financial conditions. This paper proposes a semi-structural dynamic term structure model augmented with macroeconomic factors to include cyclical dynamics with a focus on medium- to long-run forecasts. Our results clearly show that a macroeconomic approach is warranted: While term premium estimates are in line with those from other studies, we provide (i) plausible, stable estimates of expected long-term interest rates and (ii) forecasts of short- and long-term interest rates as well as cyclical macroeconomic variables that are stunningly close to those generated from large-scale macroeconomic models.

Self-fulfilling debt crises: What can monetary policy do?

This paper examines the potential for monetary policy to avoid self-fulfilling sovereign debt crises. We combine a version of the slow-moving debt crisis model proposed by Lorenzoni and Werning (2014) with a standard New Keynesian model. Monetary policy could preclude a debt crisis through raising inflation and output and lowering the real interest rate. These reduce the real value of outstanding debt and the cost of new borrowing, and increase tax revenues and seigniorage. We determine the optimal path of inflation required to avoid a self-fulfilling debt crisis. Stronger price rigidity implies more sustained inflation.

Optimal Trend Inflation

Sticky price models featuring heterogeneous firms and systematic firm-level productivity trends deliver radically different predictions for the optimal inflation rate than their popular homogenous-firm counterparts: (i) the optimal steady-state inflation rate generically differs from zero and (ii) inflation optimally responds to productivity disturbances. We show this by aggregating a heterogeneous-firm model with sticky prices in closed form. Using firm-level data from the US Census Bureau, we estimate the historically optimal inflation path for the US economy: the optimal inflation rate ranges between 1 percent and 3 percent per year and displays a downward trend over the period 1977–2015. (JEL C51, D24, D25, E31, E52)

STRUCTURAL STABILITY OF THE GENERALIZED TAYLOR RULE

This paper analyzes the dynamical properties of monetary models with regime switching. We start with the analysis of the evolution of inflation when policy is guided by a simple monetary rule where coefficients switch with the policy regime. We rule out the possibility of a Hopf bifurcation and demonstrate the possibility of a period-doubling bifurcation. As a result, a small change in the parameters (e.g., a more active policy response) can lead to a drastic change in the path of inflation. We show that the New Keynesian model with a current-looking Taylor rule is not prone to bifurcations. A New Keynesian model with a hybrid rule, however, exhibits the same pattern of period-doubling bifurcations as the analysis with a simple monetary rule.

Forecasting Inflation Under Uncertainty: The Forgotten Dog & the Frisbee

This study is an endeavour to analyse the aspect of adhering to simplicity instead of complexity when one is striving to make a forecast and faced by an unprecedented amount of uncertainty. There is substantial evidence on the exchange rate pass-through and its significant implications for the inflation in the United Kingdom. There is also ample evidence to suggest that the complex models of forecasting are outperformed by simple solutions and the use of heuristics. In that context, it seemed that the Bank of England forecast Post-Brexit is an example of sub-optimal performance of complex models in the face of high tides of uncertainty. In order to illustrate our point further, we employed the data on the consumer price index from Jan 1989 to June 2016. We compared the Post-Brexit inflation forecast by the Bank of England with an ARIMA model and a simple rule which was based on the Bank of England’s own estimates on pass-through due to exchange rate movements, similar in magnitude to the ones associated with Brexit. It showed that the actual path of inflation substantially diverged from the Bank of England’s forecast as the effects of depreciation started to kick in. It implied that in a highly uncertain environment Post-Brexit a better prediction could have been possible by allocating some weight to the effect of sharp depreciation, indeed, that would have been considering the judgment and simplicity.

DETERMINANTES DEL PROCESO INFLACIONARIO. UN ANÁLISIS DE COINTEGRACIÓN PARA EL CASO DE MÉXICO, 1980-2001

En este trabajo se emplea el análisis de cointegración para hacer un estudio de los determinantes del proceso inflacionario en México, para el periodo que abarca de enero de 1980 a diciembre de 2001. Asimismo, se reconoce la existencia de persistencia e incertidumbre inflacionarias que modifican sustancialmente la senda de la inflación, lo cual es tratado a través de un modelo de corrección de error de tipo GARCH-M. La relación de largo plazo se establece entre el nivel del tipo de cambio y las tasas de crecimiento de los salarios, de los precios y de la oferta monetaria. Se encuentran al menos dos relaciones de cointegración, lo cual puede indicar que, para el largo plazo, alguna variable se ajuste en el proceso y debería pensarse en un modelo donde no sólo se le considerara como exógena.

Credibility and Monetary Policy

This paper investigates the ability of monetary policy rules to coordinate private agents' expectations when the enforcement of rules is limited. We show that limited enforcement precludes diverging inflation paths ensuring that nominal variables remain bounded in equilibrium. When applied to Taylor rules this makes the Taylor principle necessary and sufficient for price determinacy. However, limited enforcement also allows agents to rationally anticipate multiple policies and we show that, in general, there is no policy rule able to recoordinate any private agents' belief on that rule. We finally provide conditions under which such recoordination may take place.

Determinantes de longo prazo do crédito no Brasil: Liquidez versus Capital Bancário

O presente estudo aborda a questão do canal de crédito bancário no Brasil, com dados agregados mensais, do período 2004:12 a 2013:11. Estima VECM para identificar as funções de demanda e oferta de empréstimos bancários, de longo prazo, através de testes de restrições de exclusão e de exogeneidade aplicados às relações de cointegração obtidas. Este trabalho amplia resultados obtidos anteriormente (Mello e Pisu, 2010) para o Brasil, mostrando que o oferta de empréstimos depende do spread da taxa de juros e que, para o período estudado, o estoque de crédito bancário contem informações sobre a trajetória futura da inflação. Ademais, realiza-se teste de robustez em relação aos resultados obtidos em Bezerra et al. (2016), utilizando a medida de capital bancário inicialmente usada em Mello e Pisu (2010)e observa-se que tanto essa variável como a liquidez bancária apresentam forte significância estatística.

Drivers of Low Inflation in Malta after the Crisis

Despite robust growth, inflation in Malta has been subdued after the crisis and lower than what a Phillips curve would imply. This study examines the determinants of low inflation by comparing inflation forecasts conditioning on three groups of variables – real activity, external and financial – to see which one of these categories best explains post-crisis inflation. The analysis is conducted within a Bayesian VAR (BVAR) framework over two different disinflation periods, the first one starting in mid-2008 and the other one in 2012. For Malta, forecasts conditional on the path of the external variables are the closest to the actual path of inflation in both periods. On the contrary, in the euro area, the first episode was driven by external factors but domestic factors played a more important role in the second one. This point to the significant cross-country heterogeneity among euro area countries even in the face of apparently similar patterns in headline inflation.