Real Inflation Research Articles

Pricing Inflation Linked Bonds and Hedging Bond Portfolios: A Comparative Analysis Applied to French OAT Indexed Bonds

This paper applies several alternative bond pricing models to French inflation linked bonds and nominal bonds OAT, in order to compare their ability to track their market prices and their efficiency in bond portfolio protection against interest rate risk. The pricing models used are bootstrapping, a piecewise constant forward rates method proposed by Jarrow and Yildirim (2003), a cubic spline model and the Nelson and Siegel smoothing model. The results obtained show that the bootstrapping procedure outperforms the other methods both in bond price fitness and in hedging efficiency, followed by the Jarrow and Yildirim methodology. The paper also provides evidence about the benefits of being protected against real interest rate and inflation risks versus a protection against nominal interest rate risks.

An OLS Approach to Modelling the Determinants of Private Investment in Ghana

After independence, most developing countries embraced the development paradigm of import substitution. Nevertheless, in the 1980s, there was a shift in development paradigm from import substitution to the private sector-led development strategy to boost growth in developing countries. The study analyses the determinants of private investment in Ghana using a time series data from 1980 to 2010 with the aid of multiple linear regression model. It was revealed that factors that have a significant impact on private investment in Ghana were public investment, credit supply to the private sector, external debt, openness of the economy, corporate tax and democracy. Nevertheless, variables like: GDP growth, real interest rate, inflation and real exchange rate were not statistically significant. The study therefore recommends a tighter fiscal policy to reduce the crowding out effect on private investment. Foreign trade and trade liberalization must be encouraged to ameliorate private investment in Ghana.

Interest and Inflation Risk: Investor Behavior.

We examine investor behavior under interest and inflation risk in different scenarios. To that end, we analyze the relation between stock returns and unexpected changes in nominal and real interest rates and inflation for the US stock market. This relation is examined in detail by breaking the results down from the US stock market level to sector, sub-sector, and to individual industries as the ability of different industries to absorb unexpected changes in interest rates and inflation can vary by industry and by contraction and expansion sub-periods. While most significant relations are conventionally negative, some are consistently positive. This suggests some relevant implications on investor behavior. Thus, investments in industries with this positive relation can form a safe haven from unexpected changes in real and nominal interest rates. Gold has an insignificant beta during recessionary conditions hinting that Gold can be a safe haven during recessions. However, Gold also has a consistent negative relation to unexpected changes in inflation thereby damaging the claim that Gold is a hedge against inflation.

Determinants of Net Interest Margin in the Ethiopian Banking Industry

Determinants of Net Interest Margin (NIM) of commercial banks vary from economy to economy due to variation in country, industry and firm specific factors. This study aims to assess and identify the determinants of NIM in the Ethiopian banking industry. It mainly used unbalanced panel data collected from annual reports commercial banks and the National Bank of Ethiopia for the period 1997 to 2014. Specific macroeconomic data such as Real GDP and Inflation were collected from annual reports of Ministry of Finance and Economic Development. In addition, expert opinions are obtained from officials operating in both private and public banks and used to examine the effects of changes in internal and external factors on the performance of banks. Fixed Effect unbalanced panal data model is used for data analysis. The findings of the study indicated that cost efficiency, implicit interest payment, competition and scale efficiency consistently have positive and significant effects on NIM. On the other hand, liquidity risk and management efficiency has negative and significant effect on NIM. However, macroeconomic variables like inflation and gross domestic product do not seem to have significant effect on NIM. From this finding it is possible to conclude that both bank specific and industry factors are indispensable determinants of commercial banks’ performance in Ethiopia. This, in turn, shows that operational efficiency and business growth are important areas of emphasis to register optimal return. Thus, bank executives, bank advisors and the monetary authority of Ethiopia need to focus on these two pillars performance to ensure optimal NIM in banks.

The Economic Role of Petrochemical Industry in Iran

<p>Iran’s economy is characterized by over dependence on the oil sector. Iran has been gradually growing into a centre for production of petrochemicals in the world. Petrochemical industry is one of the significant components of oil industry and is one of the principal industries in Iran which has an influential role in Iran’s economy. Although it is widely acknowledged that exports, particularly through manufactured components, play an important role as a potential source of economic growth. Hence, the aim of this research is to analysis the impact of petrochemical products export revenue on economic growth. Therefore the main objective of this research is the study of export-led growth hypothesis (ELG hypothesis) of Iran’s economy in the petrochemical industry by taking a time series data for the period of 1990-2010. It applies ordinary least square (OLS) method to investigate the relationship between gross domestic product, exports of petrochemical products, real exchange rate and inflation. The results of the study show that there is a positive relationship between export of petrochemical products and economic growth which validate export-led growth hypothesis in petrochemical industry while negative impact of inflation and real exchnage rate is observed.</p>

King of the Mountain: Shiller P/E and Macroeconomic Conditions

Contrary to naive expectations, we find that moderate rather than rock-bottom levels of inflation and real interest rates are associated with lofty valuation multiples. Moderate levels create a valuation “mountain,” which is evident not only in the U.S. stock market but in the stock markets of other developed countries. In addition to confirming the evidence presented by Leibowitz and Bova (2007) that P/Es tend to fall in times of both unusually low and high real interest rates, our work suggests a similar linkage between P/Es and inflation. We also study the mean-reversion properties of Shiller P/Es conditioned on real yields and inflation rates. If we assume that P/Es revert toward the levels thus suggested by macroeconomic conditions, we achieve far better forecasts of both long-term and short-term market returns than if we assume reversion toward the long-term historical mean. Our findings suggest new and interesting insights for monetary policy as well as valuation models.

US money supply and global business cycles: 1979–2009

This article investigates the effects of the US money supply shock on global business cycles by employing a global vector autoregressive model containing 26 economies over the period from 1979Q2 to 2009Q4. The US money supply is incorporated as an endogenous variable for the US and a global factor for other economies. When a positive US money supply shock hits the global economy, developed economies (such as the US, Euro area and the UK) will have neither real output decline nor inflation pressure, while China and some other developing countries are going to have a significant decline of real GDP. The international spillover of the liquidity effect exists. The global effects of quantitative easing are discussed as well.

Decomposing Funding Ratio Risk: Providing Pension Funds with Key Insights into Their Liabilities Hedge Mismatch and Other Factor Exposures

In recent years, adverse market conditions demolished the funding status of many defined benefit (DB) pension plans highlighting the need for better risk management. We propose a novel framework to decompose the risk of DB pension plans which differs from earlier work in two fundamental ways. First, while others focused on surplus risk, we give sound reasons to focus on funding ratio risk instead. Second, we include a special mismatch factor to measure the sensitivity of the funding ratio to changes in the value of liabilities. We illustrate our framework with a case study based on an actual DB pension fund and decompose its funding ratio risk into mismatch risk and other factor exposures dealing with real interest rates, inflation and economic growth risks.

Can US Stocks Provide a Safe Haven from Interest and Inflation Risk? A Sector Level Examination of the Response to Unanticipated Nominal, Real Interest and Inflation Rate Shocks

This paper examines the relation between stock returns and unexpected changes in nominal and real interest rates and inflation for the US stock market. With the exception of Sweeney and Warga (1986), we are the first to examine this relation in detail by breaking the results down from the US stock market level to sector, sub-sector and to individual industries as the ability of different industries to absorb unexpected changes in interest rates and inflation can vary by industry and by time period. Unlike Sweeney and Warga (1986), we also look for stability in the relations by examining them by sector during contraction and expansion sub-periods throughout a long time period, from September 1989 to February 2014. While most significant relations are conventionally negative, some are consistently positive. Specifically, we find that Integrated Oil and Gas, Commercial Services and Supplies and Diversified Metals and Mining have a consistent significant positive relation between stock returns and unexpected changes in real interest rates while Diversified Metals and Mining has a significant consistently positive relation between stock returns and unexpected changes in nominal interest rates. This suggests that investments in these industries can form a safe haven from unexpected changes in real and nominal interest rates respectively. Interestingly, we find that Gold has an insignificant beta during recessionary conditions hinting that investments in the Gold industry can indeed be a safe haven during recessions. However, Gold also has a consistent negative relation to unexpected changes in inflation thereby damaging the claim that an investment in Gold is a hedge against inflation.

Macroeconomic Determinants of the Term Structure: Long-Run and Short-Run Dynamics

We propose a no-arbitrage term structure model with a Taylor rule and two macroeconomic variables, real activity growth and inflation, that each contain long-run and short-run components. Variance decompositions and impulse responses indicate that the impact of macroeconomic variables on the term structure differs from existing models. For short maturities, inflation is relatively more important than real activity growth at short forecast horizons. For longer maturity yields, the long-run component of inflation explains most of the long-horizon forecast variance, but real activity growth matters for short forecast horizons. Unlike existing macro models, the model implies plausible term premia and expectations of short rates. The long-run components also improve the prediction of bond excess returns relative to information in the yield curve and macro variables. Measures of in-sample and out-of-sample fit confirm the benefits of allowing for long- and short-run components.

When a Hyperinflation Becomes an Official Dollarization

Cagan’s “Paradox” suggests monetary authorities print notes at rates exceeding the seignorage maximizing rate during a hyperinflation. Estimates of a Cagan-type money demand function during Zimbabwe’s recent hyperinflation suggest Reserve Bank staff generally operated below that rate. The seignorage maximizing rates derive from a short-run Structural Vector Autoregression (SVAR) applied to monthly inflation rates imputed from the parallel market exchange rate and monetary base or currency. The SVAR approach applies because tests indicate real balances and inflation exhibit trend-stationarity, rather than non-stationarity. Tests also indicate that real balances Granger-cause inflation, but inflation does not Granger-cause real balances.

The Adjustment of Current Account (Im-)Balances in Africa

Large current account imbalances are perceived to be a macroeconomic risk. Consequently a reversal (especially of a deficit) is often regarded as good in itself, and is frequently pursued as a policy objective or as part of reform programme. This perception is surprising in light of the intertemporal approach to the balance of payments, where international borrowing and lending - and therefore current account imbalances - result from rational economic decisions with a time dimension. But the theory does not settle the matter. Hence, this paper investigates the actual experience of current account reversals in Africa, the region where current account imbalances have been the largest (relative to GDP) in recent decades. We identify periods of current account reversal (both deficits and surpluses) and identify the associated development in real GDP growth, the real effective exchange rate, inflation, investment and aid inflows, both prior to and following the reversal. These results are compared with a control group. The results do not suggest that these reversals have been associated with either disruptive business cycle episodes or other macroeconomic risks in the sample group.

Bond Risk Premia Forecasting: A Simple Approach for Extracting Macroeconomic Information from a Panel of Indicators

We propose a simple but effective estimation procedure to extract the level and the volatility dynamics of a latent macroeconomic factor from a panel of observable indicators. Our approach is based on a multivariate conditionally heteroskedastic exact factor model that can take into account the heteroskedasticity feature shown by most macroeconomic variables and relies on an iterated Kalman filter procedure. In simulations we show the unbiasedness of the proposed estimator and its superiority to different approaches introduced in the literature. Simulation results are confirmed in applications to real inflation data with the goal of forecasting long-term bond risk premia. Moreover, we find that the extracted level and conditional variance of the latent factor for inflation are strongly related to NBER business cycles.

Analysis of Macro Economic Forecasting Accuracy of South African National Treasury

This research explores the accuracy of economic forecasts by the Ministry of Finance of South Africa. The Ministry of Finance began to implement economic forecasts in 1997 in the time of Minister Trevor Manuel. These forecasts were presented every year since 1997 in the annual budget speech. The Minister of Finance (Pravin Gordhan) who succeeded Minister Manuel continued to deliver economic forecasts in the annual budget speech since 2010. The research focused on the period 1997 – 2009 when Minister Manuel was the ruling political leader of National Treasury, although data for 2010 and beyond is included. A mixed-methods approach was followed to compare the annual forecasts with the actual and official statistics presented by the South African Reserve Bank and the Department of Statistics. Economic forecasts are important for the business sector, the financial sector and the government sector. These forecasts about economic indicators are used by the fiscal authority to provide information regarding the possible outcome of output, revenue and debt for the new budget year. These forecasts can also be used by various institutions for budget purposes, draft of financial contracts and planning of capital projects. Not all institutions can afford to manage a highly technical business unit that delivers economic forecasts run by various mathematical models and post graduate economic employees. The research demonstrated that the Ministerial forecasts for real growth and inflation can be used successfully. DOI: 10.5901/mjss.2014.v5n21p265

Economic Growth Volatility and Resource Curse: The Role of Financial Development

Abstract We assess whether well-developed financial systems can moderate the positive association between oil volatility and growth volatility. To this end, we follow Beck et al’s proposition (2006) and distinguish between two different kinds of volatility, that is, oil terms of trade volatility, which is referred to as real shock and inflation volatility, which is referred to as monetary shock. Using data from a sample of 63 oil-producing countries for the period of 1981-2010, the empirical analysis confirms a negative link between the volatility of oil terms of trade and growth. However, we also found weak evidence that financial development dampens the effect of oil terms of trade volatility.

'Mind the Gap': Are Sovereign Spreads a Significant Factor for Explaining Income Inequality in the Euro-Zone Periphery?

We explore whether sovereign spreads/yields, when considered along with real GDP, unemployment and inflation have had any significant effect on the equality of income distribution for a series of country-members of the European Union (plus Norway). Additional focus is given on countries of the European periphery that have undergone a “Troika-like” program and have undertaken radical policies towards fiscal consolidation and debt reduction. Using panel data, our results show that neither the sovereign spreads nor sovereign borrowing costs have had a statistically significant, direct effect upon income distribution in the European periphery; rather, growth and unemployment rates (and possibly inflation) tend to matter more. However, we do find an indirect, non-linear effect using a double-layer model, where the effects of interest rates and spreads on inequality are estimated via their pass-through on growth and unemployment. This study comes to shed more light on the potential relationship between sovereign spreads and equality in income distribution during the latest turbulent years in the European Union, hence, an area little investigated so far. Our results provide useful guidelines for policy makers interested in implementing policies for maintaining social cohesion.

The effect of real wages and inflation on labour productivity in Malaysia

This study examines the relationship between labour productivity, real wages and inflation in Malaysia using the bounds testing approach to cointegration and also the Granger causality test. The findings of this study suggest that inflation is negatively related to labour productivity. However, the effect of real wages on labour productivity is non-linear and the two have an inverted-U shape relationship. From a policy viewpoint, the Granger causality test shows that real wages Granger-cause labour productivity, but there is no evidence of reversal causation. Hence, the Malaysian dataset supports the claims by the efficiency wage theory. Moreover, we find that inflation and labour productivity in Malaysia have bilateral causality in the short- and the long-run.

Labor Market Heterogeneity and Optimal Exchange Rate Regime in Resource-Rich MENA Countries

Although countries of the MENA region are commonly considered as primary-commodity economies, they show sharp dissimilarities in a number of dimensions. Two important dimensions are the size of resource-endowments and the degree of labor market flexibility. Countries such as members of the Gulf Cooperation Council (GCC) and Libya are highly oil-endowed economies with largely flexible labor markets and substantial remittances outflows. While the rest of the MENA countries, such as Egypt, Sudan, Yemen, Algeria, Iran and Iraq, show commonalities in terms of their relatively smaller oil-endowments and the lack of labor market flexibility. This chapter attempts to incorporate the role of labor market flexibility in a unified theoretical framework of optimal exchange rate policies. For that purpose, the paper extends the standard rules-vs.-discretion model of monetary policy to allow for different assumptions about wage rigidities. The analysis suggests that when all prices are exogenous and wages are all optimally indexed to inflation (i.e., labor market flexibility), fixed exchange rate regimes deliver more desirable outcomes in terms of real output, inflation, and insulation against external shocks compared to flexible exchange rate regimes. On the other hand, the fixity of exchange rates combined with rigid goods and labor markets can add to real appreciations.

Leading Indicators of Financial Crises A Case Study of Brazil

The financial crisis has the power to influence the economy which can have significant negative impact on potential output of the economy. Many studies have been done to find leading indicators which can be monitored to predict the possibility of financial crisis. This paper examined some potential indicators which can be used to predict Brazil’s financial crisis. The motivation was that, Brazil played a unique role since the last decade. It showed high development and constant growth and did not face as many crises as the developed economies. Moreover, it was the last to be affected in the recent crisis and first to be recovered. Instead of investigating indicators with specific relevance to the Brazil’s financial crisis, frequently supported variables by literatures have been selected to investigate further. This paper found real interest rate, current account, money supply and inflation significant which can be used to predict the possibility of financial crisis in Brazil.

Variation in the fiscal multiplier with the method of financing: evidence across industrial countries

Government spending has often varied with the business cycle to stimulate the economy and to revive economic conditions. However, the state of public finances has often necessitated higher borrowing to finance widening fiscal deficits. Indeed, recent austerity packages around the globe have crystalized the importance of fiscal consolidation against the backdrop of rising public debt. To shed light on recent debates regarding fiscal multipliers, the article estimates variation in these multipliers with the method of financing, using annual data for a sample of industrial countries. There is a large variation in the effects of expansionary and contractinary government spending shocks on economic variables within and across countries. The significant effects of negative government spending shocks (fiscal contraction) appear more prevalent than those of expansionary shocks on real output growth, price inflation and nominal wage inflation. Consistent with theory’s predictions, the fiscal multiplier is more likely to be negative when government spending is financed by issuing debt and less likely in the case of monetization. The evidence confirms concerns about the negative effect of higher debt and more expensive financing on private activity, countering the effectiveness of fiscal policy.