Periods Of Low Inflation Research Articles

Dynamic hedging responses of gold and silver to inflation: A Markov regime-switching VAR analysis∗

This study examines the impact of inflation on U.S. gold and silver returns using a Markov regime-switching vector autoregressive (VAR) model and threshold regression analysis with monthly data from January 1975 to October 2023. We account for the effect of annualized inflation rates on monthly transition probabilities between high and low inflation regimes, giving inflation a central role in influencing monthly returns for gold and silver. Our findings reveal distinct behaviors: gold returns show relatively sharp and sustained responses to inflation in high-inflation regimes, while these responses are subdued in low-inflation periods. This difference explains why some studies mistakenly conclude that gold's hedging effectiveness has declined, as they often overlook prolonged periods of high inflation. Gold remains an effective hedge in high-inflation environments, while silver complements it by offering protection in low-inflation periods. Silver's broader industrial uses make it more responsive to business cycles and output growth, rather than inflation alone. This study contributes to the literature by exploring the dynamics of response times, smoothness, and intensity across inflationary regimes, emphasizing the complementary roles of gold and silver in a diversified portfolio, particularly when inflation is expected to rise within the next five months.

Profit produced by post-pandemic inflation: Evidence from an emerging economy

This paper focuses on the post-pandemic inflationary context, providing further details on how rising corporate profits contribute to the inflationary process in Türkiye. Using quarterly data from 2010 to 2022, we extend the existing literature by employing the Quantile ARDL method to assess the roles that both cost-push and demand-pull factors play in post-pandemic inflation. The chosen empirical strategy is motivated by the main objective of the study, as it allows us to quantify how the factors contributing to inflationary process differ when comparing periods of high inflation (higher quantiles) with periods of low inflation (lower quantiles). The empirical findings support the idea that the drivers of Turkish inflation are context-dependent, with specific causes emerging during inflationary episodes. The results show that cost-push factors, rather than demand-pull factors, are the main cause of the post-pandemic inflation surge in Türkiye. Our estimation results show that the coefficient for interest rates in Türkiye is only -0.42 %, while the corresponding figure for the profit share is 5.26 %, indicating that the effect of the profit share is 12 times greater than that of interest rate. We also find evidence of conflict and profit-driven inflation, confirming that the post-pandemic inflation surge in Türkiye is largely driven by cost-push factors and rising profits.

Greener and cheaper: green monetary policy in the era of inflation and high interest rates

In recent years central bankers have devoted increased attention to the question of whether and how to intervene to address the growing environmental and climate crisis. The climate intervention debate gained momentum during a period of low inflation and loose monetary policy in core economies – a time characterised by near zero interest rates and large asset purchase programmes. Since 2021, however, the macroeconomic context has changed. Against this background, the paper analyses the contradictory and problematic nature of the direction monetary policy has taken in reaction to higher inflation. It argues that higher interest rates delay the green transformation by raising the cost of sustainable investments, and that the resulting delay also hampers prospects for achieving price stability. The paper concludes that the present macroeconomic environment demands a ‘greener and cheaper’ monetary policy approach designed to address the environmental and climate crisis and also to simultaneously fight inflation.

Effects of Interest Rate Policy on Inflation

This paper analyzes the episodes of high inflation and the efficacy of raising interest rates in reducing inflationary pressures in the U.S. economy. Estimating a Markov-switching regression model, the results show that high inflation frequently occurred from 1975 to 1983 with the most prolonged duration. In the 2000s, there were merely two inflationary months in 2008, but this is too short to call it a period. Then, after a period of low inflation in 2020, inflationary pressure started to build up. From March 2021 to the present, a period of high inflation has been prevailing. The estimation results suggest that the period from 1976 to 1983 is one episode of the high inflation period, and the period from 2016 to 2022 is the second period, which is about equal in length to both periods. A simple sub-period analysis shows that an increase in the federal funds rate lowers future inflation in both periods. A vector autoregression model is then estimated to identify the monetary policy channel via the short-term interest rate together with other variables such as inflation expectations and real economic activity. A one standard deviation increase in the federal funds rate can reduce annual inflation by up to 1.6 percent in the first period and 0.74 percent in the second. The effects on expected inflation are also comparable. The results suggest that interest rate policy has been effective in controlling inflation.

Asymmetric persistence in Turkish interest and inflation rates: New evidence from quantile unit root test with structural shifts

AbstractThis study investigates the persistence in Turkish interest and inflation rates since the implementation of inflation‐targeting monetary policy, covering the period from January 2006 to July 2022. We focus on accounting for asymmetric persistence by benefiting from recent developments in quantile unit root analysis. The findings indicate that while the conventional unit root tests support the persistence of shocks to interest rates and inflation, the quantile unit root test demonstrates an asymmetric behaviour of the persistence, implying a time‐varying structure with mean reversion (persistency) of the shocks in low (high) inflation periods. Furthermore, the half‐lives increase with the positive shocks, indicating a longer speed of adjustment in the high inflation regime. These findings provide new insights into the relationship between interest rates and inflation and have sound policy implications.

Average inflation targeting when agents are learning

Many central banks consider the change of the approach to the monetary policy. One of the options is average inflation targeting. Under rational expectations this policy leads to a tangible increase in social welfare. In this paper, we demonstrate that in the case of adaptive expectations, on the contrary, it is more likely to lead to a decrease in welfare. In particular, considering the case of adaptive learning, we show that attempts by the central bank to stabilize average inflation lead to unnecessarily high output volatility. Moreover, even if the central bank includes average inflation in its loss function, it still would not optimally alternate periods of low and high inflation. Thus, the implementation of average inflation targeting seems to be inappropriate. We consider the case of the absence of zero lower bound, which allows us to formulate conclusions that are relevant for developing and developed countries which have experienced a prolonged acceleration of inflation in recent years.

Profitability of company x under inflation – case study

Aim of the work: The aim of the work is to present the impact of management profitability in company X on its business continuity in conditions of high inflation. Main research hypothesis: The price of fuels on the market played a special role in managing profitability under inflation conditions in company X. Methodology: The research material is based on the economic categories: profitability and inflation, subject literature and other sources (the author, by analyzing the economic categories: profitability and inflation, tried to discover their impact on the business continuity of company X). The studies used, among others, the Du Pont model, the Quick Test method, the E. Altman method and the β-business paradigm method of Z. Mietlewski. Research results: Return on sales (ROS) ratios in company X in the analyzed period was lower than the inflation rate, and the return on assets (ROA) ratio was higher than the inflation rate, as was the return on equity (ROE) ratio. All of these indicators at company X were significantly above the average in the transport and logistics sector. High inflation was not severe for company X, because the company compensated the increase in fuel purchase prices in this period by raising the rates for transport services, and thanks to the repayment of their loan, it did not experience an increase in interest rates. Hence, e.g. during this period, the company was characterized by high profitability compared to the competition. In 2022, the year of high inflation, the company started to generate profit earlier than in the period of low inflation in 2019-2020. The profitability management model adopted by the company focused on regulating the sale prices of transport services depending on fuel prices and on reducing the costs of external services in the company’s activities. Company X was not at risk of bankruptcy during the period under study and its equity had little impact on its business continuity. A major risk for company X is having only one large contractor in its portfolio, which determines the company’s profitability.

Price Adjustment in the Euro Area in the Low-Inflation Period: Evidence from Consumer and Producer Micro Price Data

Price Adjustment in the Euro Area in the Low-Inflation Period: Evidence from Consumer and Producer Micro Price Data

The closer we get, the better we are?

AbstractNot always. A general requirement in models of expectations formation is that forecast accuracy should improve when getting closer to the target date. We apply a multi‐horizon bootstrap test to a unique Israeli survey of firm‐level inflation forecasts, which encompasses periods of three digits annual rates, and periods of moderate and low inflation. We find that improvements in forecast accuracy were significant during high and moderate inflation periods, but not in the low‐inflation environment. The results are in line with rational inattention, induced by a decline in inflation predictability. Further support is provided by evidence from the US SPF survey.

The Impact of Inflation Rate on Private Consumption Expenditure and Economic Growth—Evidence from Ghana

The effect of inflation on an economy has far-reaching implications. One of the most significant effects of inflation is the uncertainty created when the inflation rate is fluctuating, which can reduce or increase consumer purchasing power. The study employed the Engle-Granger Cointegration, error correction, and granger causality as estimation techniques to determine the association between inflation rate and private consumption expenditure. In this study, using the ordinary least square econometric method, the study empirically assessed the impact of inflation on private consumption expenditure and economic growth between 1990 and 2020. The data were first analyzed using the Augmented Dickey-Fuller (ADF) test which indicates that all the variables of interest were stationary after their first differencing. The study found a cointegration relationship between private consumption expenditure, inflation rate, interest rate, and gross domestic product rate. The study found that in the long run, INF has a negative significant effect on PconX, while INTR and GDPR have positive significant effects on PconX. The study’s empirical findings show that there is a long-run negative significant relationship between inflation and private consumption expenditure in Ghana, meaning that private consumption expenditure in Ghana reduces on products and services during periods of high inflation than during periods of low inflation”. According to the findings, inflation expectations have a detrimental impact on private consumption expenditure attitudes, particularly among consumers in a very favorable financial situation. Furthermore, since the global financial crisis, the importance of inflation expectations has grown. The results for consumption expenditures are quite evident and difficult, particularly when compared to the results for interest rates and economic growth, as they imply a positive and relatively strong relationship to inflation. As a result, based on the findings of the study, the research advised that the government should provide low and stable prices at all times to prevent the negative impact of inflation on private consumption. Also, it was advised that the government, in collaboration with the Bank of Ghana, formulate and implement prudent fiscal and monetary policies aimed at stabilizing macroeconomic factors to boost economic growth.

Commodity prices and inflation risk

SummaryThis paper investigates the role of commodity price information when evaluating inflation risk. Using a model averaging approach, we provide strong evidence of in‐sample and out‐of‐sample predictive ability from commodity prices and convenience yields to inflation, establishing clear point and density forecast performance gains when incorporating disaggregated commodities price information. The resulting forecast densities are used to calculate the (ex‐ante) risk of inflation breaching defined thresholds that broadly characterize periods of high and low inflation. We find that information in commodity prices significantly enhances our ability to pick out tail inflation events and to characterize the level of risks associated with periods of high volatility in commodity prices.

THE ROLE OF ELECTRONIC PAYMENTS IN INFLATION DYNAMICS

The technological progress is transforming economy, trade and also their determinants and dynamics. Technological developments have serious effects on payment services, especially in the last 20 years. The world has been in a low inflation period compared with the previous periods. In this context, this study investigates the relationship between electronic payments and inflation dynamics in Turkey. A single equation model with the electronic payments variables is applied with quarterly data between 2005:3 – 2016:3. In the equation, the total number and total volume of transactions in the electronic fund transfer system are used as proxies for the real economy and monetary policy actions. The estimation results show that both the volume and number of transactions have effects on inflation dynamics.

Asymmetric Fisher effect in inflation targeting emerging markets: evidence from quantile co-integration

ABSTRACT We test Fisher hypothesis in 14 inflation targeting emerging countries by quantile co-integration approach allowing asymmetric behaviour of long-run co-integration relationship. While conventional co-integration methods do not support Fisher hypothesis for any country, quantile co-integration approach confirms Fisher hypothesis in nine countries with time-varying behaviour of Fisher coefficient. Our results thereby can shed light on Fisher puzzle in inflation targeting emerging markets and provide insightful implications. The findings suggest that inflation targeting in emerging markets would lead to an asymmetric adjustment, implying heterogeneous effects of negative and positive shocks. Monetary authorities, in particular, tend to increase short-term interest rates by a larger amount during high inflation period than low inflation period.

Quantitative easing and exuberance in stock markets: Evidence from the euro area

In response to a prolonged period of low inflation, the ECB introduced QE in an attempt to steer inflation to its target of below, but close to, 2% in the medium term. This paper examines whether QE contributes to exuberance in euro area stock markets by using recent advances in bubble detection techniques (the GSADF test). We do so by linking price developments in ten euro area stock markets to a series of country specific macro fundamentals and QE. The results indicate that periods of QE coincide with exuberant investor behaviour, even after controlling for improving macro fundamentals.

The price adjustment hazard function: Evidence from high inflation periods

The price adjustment hazard function - the probability of a good’s price changing as a function of its price misalignment - enables the examination of the relationship between price stickiness and monetary non-neutrality without specifying a micro-founded model, as discussed by Caballero and Engel (1993a, 2007). Using the micro data underlying the U.S. Consumer Price Index going back to the 1970s, we estimate the hazard function relying on empirical patterns from high and low inflation periods. We find that the relation between inflation and higher moments of the price change distribution is particularly informative for the shape of the hazard function. Our estimated hazard function is relatively flat with positive values at zero. It implies weak price selection and a high degree of monetary non-neutrality: about 60% of the degree implied by the Calvo model, and much higher than what menu cost models imply. In addition, our estimated function is asymmetric: price increases are considerably more likely to occur than price decreases of the same magnitude.

Solutions for Enhancing Risk Management Mechanism of Vietnam Bank System - Case of Listed Banks

This study uses weekly data from listed banks system on Vietnam stock exchange into 2 groups: group 1: previous Private banks (including Saigon Hanoi Bank-SHB, Eximbank-EIB, Navibank-NVB, Sacombank-STB and Asia Commercial Bank-ACB), and group 2: Previous SOEs banks (including Vietcombank-VCB and Vietinbank-CTG). We called the period 2011-2015 as pre- low (L) inflation period. After global crisis 2008-2009, Banks in Vietnam both enhance risk management mechanisms and contribute to community activities over years. This study mainly use combination of quantitative methods (statistics, calculation formulas) and qualitative methods including synthesis, inductive and explanatory methods. The research findings tell us that mean of beta CAPM values in group 2 is (<) lower than 1. While that of beta in group 1 is higher than 1 (in case of EIB, NVB and SHB). Besides, this study also give out recommendations for enhancing risk management system of Vietnam banks in future and give out directions or implications for banking policies.

Enhancing risk management culture for sustainable growth of Asia commercial bank -ACB in Vietnam under mixed effects of macro factors

For sustainable growth, macro policy makers will need to look at risk management in banking industry and impacts of macro factors on market risk in order to adjust policies and build risk management culture in banking system. What we need to adjust in trade balance, risk free rate and other policies? This is one of reasons for us to conduct this study.This paper measures the Beta CAPM in famous model under impacts of both macro internal and external variables during low inflation time 2015-2020 in the country. The evidence is the fundamental role of risk management in commercial bank has been increasing with new perspectives in management, corporate governance and risk management models. We will estimate effects in risk measurement of one of big listed Vietnam commercial bank, Asia commercial bank (ACB) during the low inflation period 2015-2020 with semiannual data. Through using analysis, synthesis statistics methods, and dialectical materialism method, combined with econometric model with 9 macro variables, we figure out that CPI has a positive correlation with Beta CAPM of ACB, while Risk free rate (Rf) and lending rate have negative correlation with Beta CAPM of the bank. It implies that increase in inflation, together with decrease in Rf and lending rate will increase market risk.Then, one of its major findings is the suggestion of macro and risk management policies for bank and relevant government agencies. Our recommendation can be used for reference and expand researches in many other emerging markets.

Balancing Monetary and Fiscal Policy Objectives: Central Bank Independence During the Global Pandemic

The use of unconventional monetary tools, and particularly the resort by central banks to asset purchase programs instigated as a means of addressing prolonged periods of low inflation, has not only heralded times during which new and innovative approaches to regulation can be expected, but also highlights the significance of a growing acknowledgement that changes in financial instruments, payment systems and trading platforms are significantly altering the financial landscape and also the need for monetary policies to adopt more accommodative approaches to regulation traditional tools and inflation targeting mechanisms are not as relevant as they used to be - particularly against the backdrop of the impact of crypto currencies and the need to ensure that financial stability can be guaranteed where such assets, which have great potential to trigger systemically relevant risks, and more specifically, stable coins which are backed by a basket of commodities or government bonds, are in operation. As well as highlighting why unconventional and conventional accommodative monetary policies have been propagated as being crucial to achieving dual mandates and goals of leading central bank economies, drawing from lessons and experiences whereby accommodative monetary policies have been instigated as a means of addressing prolonged periods of low inflation, this paper highlights how such experiences can also be used to bolster the proposition that since monetary policy space is limited, and many of the challenges faced are beyond mandates of central banks, these should be addressed through structural and fiscal policies.

Inflation expectations and the ECB’s perceived inflation objective: novel evidence from firm-level data

In this paper we use a unique dataset to study how awareness of the formulation of the ECB’s inflation aim, defined as below, but close to, 2%, shapes the inflation expectations of a representative set of Italian firms. In particular, we show that in the period under consideration such awareness raises firms’ inflation expectations by about 25 basis points at all time horizons with respect to the control group. In the recent period of low inflation, this finding implies that being informed about the ECB’s aim stabilizes firms’ inflation expectations at higher levels, closer to its target. However, this occurs at the expense of a lower correspondence of such expectations with ex-post realized inflation, especially on short-term horizons. When explicitly asked, the majority of firms indicates the ECB inflation aim as being between 1.0% and 1.5%, while just a few of them see it as between 1.7% and 1.9%. This result might be related to the difficulty of interpreting the “below, but close to” formulation, and suggests that a precise definition of the ECB’s inflation aim could be easier to communicate and more likely to be properly understood.

Understanding Low Inflation in the Euro Area from 2013 to 2019: Cyclical and Structural Drivers

From 2013 up to the launch of the ECB’s strategy review in January 2020, inflation in the euro area was low and over-predicted. This low inflation during the years 2013-19 can be attributed to a combination of interconnected factors. Cyclical developments account for a substantial share of the fall in underlying inflation, mainly in the first part of the low inflation period. Additionally, there is evidence that an underestimation of the amount of economic slack and less well-anchored longer-term inflation expectations, in combination with monetary policy in the euro area being constrained by the effective lower bound, have played an important role in the long period of subdued inflation. Ongoing disinflationary structural trends (such as globalisation, digitalisation and demographic factors) are likely to have had a dampening effect on inflation over the last few decades, but were in themselves not the main drivers of low inflation in the euro area from 2013 to 2019. However, as they could not have been easily offset by interest rate policy in an effective lower bound environment, they might also have contributed to the more subdued inflation dynamics in the euro area from 2013 to 2019. JEL Classification: C51, E31, E32, E37, E52, F62, J11, J30