Relative Price Structure Research Articles

Threshold inflation and relative price variability – a proposal for inflation targeting in Lebanon

PurposeThe study investigates the impact of inflation on the variability of relative prices in the context of Lebanon.Design/methodology/approachUnlike the traditional method, which relies on the variance of cross-sectional price changes measured at specific points in time to gauge the variability in relative prices, we employ a more appropriate approach. Under this approach, we capture the dispersion in relative prices by estimating how widely (or closely) a set of commodity prices drift apart over a span of time, offering a more comprehensive assessment. Firstly, we employ Johansen’s cointegration test on rolling subsamples to determine the number of statistically significant cointegrating vectors among the prices of 12 major commodity groups. Under this approach, an increase in the number of significant cointegrating vectors indicates a reduction in relative price variability, while a decrease suggests the opposite. Subsequently, we employ ordinary least squares regression to analyze how the fluctuations in inflation affect the variability in relative prices. The sample period ranges from December 2007 to April 2021.FindingsThe empirical results indicate that there exists a certain threshold inflation rate corresponding to which the variability in relative prices is minimized. More importantly, consistent with the theoretical predictions, the results suggest that it is not inflation per se, but the deviation of inflation from the 3% threshold level in either direction that causes higher dispersion in relative prices.Research limitations/implicationsThe empirical findings from this study have crucial implications for the operation of monetary and fiscal policy. In particular, these findings suggest that stabilizing long-term inflation around a certain threshold rate will not only help to anchor inflation expectations effectively but will also minimize the welfare costs associated with inflation.Originality/valueGiven the rising inflationary pressure in the recent past and its welfare costs, the study assumes crucial importance in understating how fluctuations in inflation distort the relative price structure and eventually cause resource misallocations and economic inefficiency.

ANALYSIS OF THE GLOBAL FOOD CRISIS IN INTERNATIONAL MARKETS BY THE ASYMMETRIC TVP-VAR METHOD

It is the expenditure on consumption that constitutes the basic share of the expenditures of the households that supply labor as a factor of production in an economy. These expenditures have an indirect effect on the input costs of the companies that demand labor as a production factor. The change in food prices determines both the relative price structure of the economy and the inflationary trend in the economy for the future, depending on the changes in labor and goods markets. For this reason, households that make the consumption decisions of companies as a producer decision unit in the economy are highly sensitive to changes in food commodity prices. A continuous and permanent change in food commodity prices has a direct impact on consumption expenditures and investment decisions. This effect causes supply shocks that may arise as a result of food and commodity prices to turn into demand shocks at the same time. From this point of view, this study investigates the distribution of volatility in global commodity prices, food commodity prices, Baltic dry indices, and crude oil prices, which are the indicators of price trends of basic inputs in international markets. Thus, the mechanism of spillover of a possible supply shock is revealed at the international level under the restrictions of the asymmetric TVP-VAR approach.

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Mudança estrutural, preços relativos e distribuição funcional da renda: o caso brasileiro (1995-2009)*

Resumo Este trabalho analisa o papel das transformações da estrutura produtiva sobre a evolução da parcela do trabalho na renda agregada no Brasil no período 1995-2009. Foi realizada uma decomposição estrutural do crescimento da parcela do trabalho, isolando o efeito das alterações na composição setorial da renda real dos efeitos relacionados aos ajustes dos preços relativos e à trajetória do salário médio real em relação à produtividade. As mudanças na composição setorial da renda tiveram um papel relevante para a evolução da participação das rendas do trabalho. Entretanto, essas mudanças se deram principalmente pelas alterações na estrutura de preços relativos mais do que por mudanças na composição real da renda. Por fim, observou-se que estes resultados podem ser associados às mudanças institucionais ocorridas no período, em especial às privatizações na década de 1990 e à política de valorização do salário mínimo real nos anos 2000.

The Size of the Border and Product Market Integration Between Lesotho and South Africa: A Production–Consumption Approach

Despite efforts to increase integration within Africa, product markets remain segmented between countries. This paper examines the magnitude of price gaps, known as the border effect, between Lesotho and South Africa using retail price data for 49 products in 35 cities over the period 2006–2009. Using a production–consumption pair approach, we estimate that crossing the border between South Africa and Lesotho is associated with an absolute product price gap that widened from 18% in 2006 to 24% in 2009. The structure of relative prices also differs markedly revealing a lack of convergence to a common set of internal relative prices. These results are robust to the choice of alternative production centres in South Africa and the imposition of distance thresholds between region pairs. The results indicate that the border between South Africa and Lesotho remains an impediment to trade flows and price competition, despite their joint membership in a customs union and monetary area.

Tradable and non-tradable expenditure and aggregate demand for imports in an emerging market economy

Using an assumption of non-separability of non-tradable expenditure from imports, this paper examines the impact of the structural transformation undertaken after 2001 on imports and, in turn, the current account stance of Turkey. In this regard, an import demand function is derived under the assumption of non-separability, and is estimated using quarterly time series data from Turkey. The empirical results show that the assumption of non-separability cannot be rejected in the case of Turkey and the relative prices of non-tradable and tradable goods must be among the determinants of import demand in addition to the relative price of imports and real GDP. This result accordingly implies that recent increases in import expenditure are, to some extent, due to changes in the relative price structure in favour of non-tradable goods.

The economics of immigration: An Austrian contribution

Any managed migration system will fail to achieve the optimal quantity or mix of immigrants because centrally planning the international labor market suffers from the same epistemic problems that make it impossible to optimally plan any market. In response to the artificial relative price structure, imposed by managed migration systems, the domestic stock of human and physical capital becomes distorted. Managed migration systems also set in motion the dynamics of intervention that lead to further interventions into the economy.

Effects of devaluation of currency on a developing country like Malawi (a small African country)

The Malawi Government was a British colony and after independence the local currency, the Malawian Kwacha (MWK) up to 1973 played to the same level with the British Pound (GBP). From that time, the authorities used many policies for proper management of the economy. These include and not limited to the devaluation, floatation and exchange rates adjustments with the view of creating conducive environment for economic growth. The authorities tried to manage the devaluation and floatation of the currency most importantly because its results have widespread effects on the whole economy. In a country like Malawi, where the exports are not at par with the imports and the equation being in favour of the latter it can be disastrous to leave these instruments uncontrolled. These things affect the country's relative price structure between tradable and non-tradable goods and later the overall level of domestic prices. The devaluation and floatation of the currency are among the most important tools in management of the economy and price stabilisation in most developing countries.

Current Account & Real Exchange Rate Dynamics in the Caribbean and Latin America Compared to the G7 Countries

This paper analyses the impact of temporary monetary shocks and permanent productivity shocks on the exchange rate and current account in Jamaica, Argentina, Bolivia, Chile, Columbia, Costa Rica, Mexico, Paraguay and Peru following the technique by Lee and Chinn [1] who analysed the same for the G7 countries. Our findings indicate that during the period 2005-2014, permanent productivity shocks have a greater long term effect on the real exchange rate, but relatively little effect on the current account, while temporary shocks have greater effect on the current account and exchange rate in the short run, but not on either variable in the long run. The same results as in Lee and Chinn [1] for the G7 countries except the US hold for Argentina, Bolivia, Chile, Columbia, Costa Rica, Jamaica, Mexico, Paraguay and Peru. The results are also consistent with the sticky price model of Obstfeld and Rogoff [2]. Lee and Chinn [1] postulate that, the greater impact of a permanent productivity shock in the US economy may be due to a substantial swing in the US foreign currency policy relative to other G7 countries. The stronger impact of temporary shocks on the current account in the Caribbean and Latin American Countries as well as in the other G7 countries may be attributed to nominal price movements that alter the relative price structure between countries. The latter results, display no significant pricing to market effect resulting from exchange rate overshooting caused from a monetary shock.

The Impact Of Price Changes On Demand Among Poor Households In A South African Township

The study reported in this article used household level data to analyse the impact of recent price changes on the demand for food and non-food items among households of different poverty statuses in a township of Bophelong, Gauteng Province, South Africa. The unprecedented rises in prices prompt households to make adjustments on their consumption patterns as real income declines. In this paper, the poor are separated from the non-poor by means of an income poverty line and their responsiveness to price changes compared. Of the sampled population, 56% were found to be poor of which 26% of the participants were categorised as moderately poor, with 30% extremely poor. Changes in demand patterns of households are estimated by computing the demand elasticities that explain the level of demand by a household given the structure of relative prices faced and household income. The study reports that households respond differently to rising prices depending on their poverty levels.

Inflation and relative price variability: Evidence for India

This study decomposes relative price variability into a component due to inflation and a component due to real factors. The empirical results for India suggest that real factors account for 55% and inflation accounts for 45% of the variability in relative price changes. The proportion of inflation induced relative price variability increases with the rise in inflation, implying that inflation has distortionary effects on the structure of relative prices. Further, larger part of variability in the relative price changes seems to have been generated by fluctuations in the relative prices of a few commodities. The sector wise analysis shows that the major share of total relative price variability is contributed by fluctuations in the prices of manufactured products. The more crucial inference that emerges from the empirical analysis is that the inflation rate at which variability of relative price changes is minimum is found to be 4.5%, which is consistent with the official threshold rate often claimed by the Reserve Bank of India.

Robust Political Economy: An Institutional Alternative Against Monetary Disequilibrium and Market Discoordination

The scope of this essay seeks to understand how we can achieve a more stable and dynamically self-correcting monetary arrangement which will minimize the likelihood of having severe monetary disruptions on the economic system. We wish to find systems that minimize systemic macroeconomic disequilibrium, which arises whenever money severely distorts the structure of relative prices, creating market discoordination and hampering economic exchanges. Monetary equilibrium theory provides the propitious theoretical tool allowing us to comprehend how monetary disequilibrium may arise within the economic system. It also serves as a benchmark to which we can compare different monetary institutions; this enables us to determine which system might perform closer to our monetary equilibrium benchmark. Under this framework, we analyze two monetary arrangements: central banking and free-banking. Through a process of institutional comparison, we can establish which one can minimize overall market discoordination and therefore will do the least harm to the epistemic role of prices and other market signals in communicating the embedded information present in them. Finally using the framework of Robust Political Economy, we reevaluate the main assumptions which sustain the case for a centralized monetary institution on being capable of reaching the monetary equilibrium benchmark. We specifically reevaluate the assumptions concerning political pressure, self-interest, aligned incentives and the degree of decisionmakers’ omniscience present in central banking and free-banking. By relaxing these assumptions, we analyze how different monetary arrangements would be considered robust or fragile in achieving and maintaining monetary equilibrium.

The DM and the Ossi Consumer: Price Indexes During Transition

Family budget data for East and West Germany over the past decade are analyzed in the light of the convergence of relative price structures and the elimination of quantity constraints in the East during the process of eastern economic reconstruction. Exact cost-of-living indexes for generalized Cobb-Douglas preferences are calculated for the missing (index) link between the end of the old German Democratic Republic and the beginning of German economic unification. Exact deflators are provided for the period 1989 through 1998 for low to high income family budgets.

Sources of Household Income in Rural Afghanistan

Using countrywide household surveys from 2003 and 2005, Afghan rural households are shown to have a variety of sources of income, including a pervasive incidence of wages and remittances, and a thorough monetization of their economies, in which payments in kind and other non-monetary relations appear to play a reduced role in comparison with monetary transactions. From these data several practical implications are drawn. One of them is that Afghan peasants, like any other people in a monetized economy, are expected to respond to economic incentives and macroeconomic policies. Policies effectively addressing wage employment and wage rates, or facilitating trade and money transfers, will have immediate impact upon the welfare of Afghan farmers and their families, on condition that those policies address the informal arrangements common in rural Afghanistan, which can only be addressed through incentives and not much through regulation. The relative rarity of payments in kind means that money and market prices are the dominant economic forces mediating economic relations in the Afghan countryside, and therefore policies affecting the purchasing power of money, the general price level and the structure of relative prices are likely to be the most powerful instruments to influence the economic behaviour of the rural population.

Good deflation/bad deflation and Japanese economic recovery

Many economists dismiss the role of positive supply shocks as a cause of Japan’s deflation. Indeed, they sometimes attribute the long delay in Japan’s recovery to the mistaken view that Japan’s deflation reflects an acceleration of technological progress. Whatever the current situation in Japan, however, economic history certainly suggests that technological progress can go hand in hand with general deflation. Conducting a VAR analysis using very detailed information about the components of Japan’s consumer price index, this paper finds that short-run shocks to Japan’s relative price structure persist in the long run. Given this finding, it is possible to conclude that such shocks are real in origin and reflect technological change. As no effort has yet been completed to show the full extent to which technological change is driving short-run relative price change in Japan compared with other factors, and the full extent to which relative price changes are driving aggregate price change compared with other factors, the policy implications of these findings are unclear. What is clear is that it is a mistake to dismiss out of hand the possibility that technological shocks are playing an important role among other forces in Japan’s current deflation.

EARLY 1930'S: A UNIQUE PERIOD IN FISCAL EVOLUTION?

The early 1930's brought significant institutional and policy changes, which then had a long lasting effect on the country's social and commercial life. New, powerful and highly discretionary instruments became at the disposal of the State which, combined with traditional tariffs, began to be used by it to regulate trade flows. Together with direct government investment in the production of good and services, they became the most important public policy instruments used to determine the development structure of the country in the following decades. Chile also lost its monetary anchor during the Great Depression, making very significant inflationary price level expansions possible. In the case of specific goods, these price expansions then offered an opportunity for State interventions into the relative price structure. Whatever the precise underlying cause for such a policy, from 1932 onwards, government began to manage relative prices, for which the necessary legal framework, including strong enforcement instruments, was also approved in the latter year. At the same time, the above mentioned trade inhibiting instruments began to be used to make price controls viable. In particular, multiple exchange rates and the accompanying import quota system, gave price controls real content. Ongoing inflationary pressures transformed price fixing into a permanent and increasingly significant public activity. The above mentioned government interventions began with the Great Depression, but it is important not to loose sight of the fact that the increasingly discretional role of the State in the economy, especially its executive power, is of older data. For example, also in the 1920's, significant institutional redesign took place. The role of the market and Parliament in resource allocation decreased,

Arbeitsmarktreform und Beschäftigung über die ökonomietheoretischen Grundlagen der Vorschläge der Hartz-Kommission

The Hartz-Commission recommends the reduction of unemployment by increasing the efficiency of the labour bureau, increasing the number of low-wage jobs and subsidising firms which employ unemployed. In addition benefits especially for long-term unemployed should be cut. The hope to cut unemployment by these measures by two million until 2005 is far to optimistic. The theoretical basis of the Hartz-proposals are weak. It is not seen that changes in the structure of wages or changes in distribution generally modifY the structure of relative prices and the technology. Lower wages in these case may not lead to higher employment. The Hartz-proposals completely neglect macroeconomic dimensions of economic policy and completely concentrates on labour market flexibility and higher efficiency of the labour bureau.

Monetary policy dilemmas in a transition economy: The case of Hungary

This paper addresses the experiences and challenges of Hungary’s monetary policy during the period 1995–2000 and in view of the progress toward EU and EMU membership. The structure of relative prices changed markedly in the past and is expected to continue to change in the future. The reason, in addition to a possible Balassa–Samuelson effect, was the elimination of subsidies and introduction of turnover taxes in the past, and a future convergence toward a price structure prevalent in the EU. In the 1995–2000 period, the resulting gap between CPI and PPI led to massive foreign capital inflows. While the policy of sterilised interventions by the National Bank of Hungary was probably the right answer, it was inevitably costly, and was made costlier than necessary by the way it was carried out. Continued adjustments in the price structure in the future will confront monetary policy with the same dilemmas and, resulting in an inflation floor, will complicate the country’s conditions of joining EMU within a reasonable time frame after EU accession.

Energy savings of integrated and coupled distillation systems

Direct separation sequence without, with forward, and with backward energy integration, indirect separation sequence without, with forward, and with backward energy integration, sloppy separation sequence without (preflash system), with forward, with backward, and with double energy integration, and thermally coupled sloppy separation sequence (Petlyuk system) are compared with short-cut and rigorous modelling. Based on theoretical considerations and economically evaluated rigorous case studies for ternary mixtures it is demonstrated that in the most cases the Petlyuk system is not superior to the energy integrated configurations even in energy savings. According to the energy consumption of sharp separation determined by short-cut methodology, all the sloppy sequence structures are equivalent. According to the energy losses determined by short-cut methodology, derived here, the energy-integrated structures win almost everywhere in the studied conditions that include a range of relative volatility ratios and the whole feed composition triangle. According to rigorously simulated and optimised results, together with controllability studies, the advantageous application of the thermally coupled (Petlyuk) systems is constrained to a very small range of relative volatility ratio, feed composition, and price structure. This small range is situated somewhere around balanced relative volatility ratio A/B to B/C, small amount of the middle component B, balanced presence of the two swing components A and C in the feed, and high energy costs to investment costs ratio or slow depreciation rate.

Convergence of Relative Prices and Inflation in Central and Eastern Europe

The paper assesses inflation risks resulting from the convergence of structures of relative prices in Central and Eastern European (CEE) countries toward the European Union (EU). The basic idea of the paper is that under low downward flexibility of domestic nominal prices, the adjustment of relative price structures is likely to lead to higher inflation. The authors find that the degree of differences in the structures of relative prices in transition economies vis-a-vis EU economies has a strong negative relationship to price levels in the transition economies. Based on their calculations, the authors assess the likely future inflationary pressures that can stem from the remaining differences between the structures of relative prices in the CEE economies and the EU. The authors argue that their approach can be thought of as an extension of the standard Balassa-Samuelson explanation of international variability in price levels.