Trend Inflation Research Articles

Macroeconomic changes with declining trend inflation: Complementarity with the superstar firm hypothesis

Recent studies indicate that, since 1980, the US economy has undergone increases in the average markup and the profit share of income and decreases in the labor share and the investment share of spending. We examine the role of monetary policy in these changes as inflation has concurrently trended down. In a simple staggered price model with a non-CES aggregator of individual differentiated goods, a decline of trend inflation as measured since 1980 can account for a substantial portion of the changes. Moreover, adding a rise of highly productive “superstar firms” to the model can better explain not only the macroeconomic changes but also the micro evidence on the distribution of firms’ markups, including the flat median markup.

Public debt and inflation dynamics: Empirical evidence from Zimbabwe

Abstract The study seeks to empirically test the hypothesis that public debt has a significant influence on inflation in Zimbabwe, covering the period 1980-2020. The study was motivated by recent trends in public debt and domestic inflation in Zimbabwe, and the need to guide debt-inflation related policy. These latest trends have started to ring alarming bells, which raises questions on the effectiveness of fiscal and monetary policies in bringing macroeconomic stability in the country. Applying the Autoregressive Distributed Lag (ARDL) bounds testing procedure to cointegration and an error correction mechanism (ECM), expanded by incorporating structural breaks, the study finds evidence in support of positive and significant impact of public debt on inflation dynamics in Zimbabwe, particularly in the long run. Based on the findings, public debt dynamics matter for inflation process in Zimbabwe. That is, fiscal policy can be considered to be an important determinant of the effectiveness of monetary policy in Zimbabwe. Therefore, the government should be mindful of increases in public debt as this was found to be inflationary.

DOES THE LAW OF ONE PRICE (LOP) HOLDS IN THE INTERNATIONAL BARLEY MARKETS

A price time-series data of barley for a period of 49 years (1970-2019) sourced from the FAO database was used to determine the horizontal market integration of barley among some selected major market players in barley trade in the world. The chosen markets are Australia, Canada, Iran, Turkey and the USA based on the availability of up-to-date large span data. The collected data were analyzed using inferential statistics- unit root tests, co-integration tests, unrestricted vector autoregressive model, Granger causality test and impulse response function. The empirical evidence showed that the law of one price (LOP) exists among the selected markets i.e. there is perfect price communication among the markets in the long run, thus highly integrated. Besides, Australian and Canadian markets established a long-run equilibrium, thus have a stable price in the long run. Furthermore, the import and export hubs of barley in the trade are Canadian, USA and Turkey markets while Iranian and Australian markets are large consumer markets. The empirical evidence showed Canadian and USA markets to be the major players in the trade while the Australian market is a follower in the trade. All the selected markets have promising future prices with a little inflationary trend which will owe to supply fluctuation. The reinforcement of physical infrastructure, the use of ICTs and well-defined consistent agricultural policy/market initiatives would thus lead to the global creation of a single uniform economic market for barley.

Effects of trend inflation on monetary policy and fiscal policy shocks in Vietnam

PurposeThis paper analyzes variations in the effects of monetary and fiscal shocks on responses of macroeconomic variables, determinacy region, and welfare costs due to changes in trend inflation.Design/methodology/approachThe authors develop the New-Keynesian model, in which the central banks can employ either nominal interest rate (IR rule) or money supply (MS rule) to conduct monetary policies. They also use their capital and recurrent spending budgets to conduct fiscal policies. By using the simulated method of moment (SMM) for parameter estimation, the authors characterize Vietnam's economy during 1996Q1–2015Q1.FindingsThe results report that consequences of monetary policy and fiscal policy shocks become more serious if there is a rise in trend inflation. Furthermore, the money supply might not be an effective instrument, and using the government budget for recurrent spending produces severe consequences in the high-trend inflation economy.Practical implicationsThis paper's findings are critical for economists and monetary and fiscal authorities in effectively designing both the monetary and fiscal policies in confronting the shift in the inflation targets.Originality/valueThis is the first paper that examines the effects of trend inflation on the monetary and fiscal policy implementation in the case of Vietnam.

Time‐Varying Dynamics of the German Business Cycle: A Comprehensive Investigation*

AbstractThis paper provides insights into the time‐varying dynamics of the German business cycle over the last five decades. To do so, I employ an open‐economy time‐varying parameter VAR with stochastic volatility, which I estimate by quasi‐Bayesian techniques. The reduced‐form analysis reveals substantial shifts in the variables’ long‐run growth rates and shock volatilities over time. German trend inflation has strongly decreased and settled at a historically low level. GDP growth volatility exhibits marked fluctuations over time and has dropped to historically low levels only after the global financial crisis. The structural analysis employs externally identified oil supply shocks along with a recursive identification scheme to identify key macroeconomic shocks. The analysis reveals strong fluctuations in both the impact responses of macroeconomic aggregates to these shocks and the shock propagation processes. Thus, I conclude that business cycle stabilization in Germany is driven by both good policy and good luck.

Should the ECB adjust its strategy in the face of a lower [formula omitted

We address this question using an estimated New Keynesian DSGE model of the Euro Area with trend inflation, imperfect indexation, and a lower bound on the nominal interest rate. In this setup, a decrease in the steady-state real interest rate, r★, increases the probability of hitting the lower bound constraint, which entails significant welfare costs and warrants an adjustment of the monetary policy strategy. Under an unchanged monetary policy rule, an increase in the inflation target of eight tenths the size of the drop in the real natural rate of interest is warranted. Absent an increase in the inflation target, and assuming the effective lower bound prevents the ECB from implementing more aggressive negative interest rate policies, adjusting the monetary strategy requires considering alternative instruments or policy rules, such as committing to make-up for recent, below-target inflation realizations.

The long-run effects of pandemics on inflation: Will this time be different?

We find that past major pandemics have led to a significant decline in trend inflation in Europe that lasts for more than a decade. The effects of the COVID-19 pandemic on trend inflation could, however, be different this time around.

A Study on the Relationship between Hostel Investment and Inflation in Akure, Nigeria

One of the important objectives of holding an investment is to protect investors’ real currency value invested against inflationary trend and enjoy a continuous positive flow of real return. In Nigeria, majority of investors in real estate are uncertain concerning the hedging capability and existing relationship between return in real estate and inflation rates. This research paper identifies the degree of relationship between returns in hostel investment and inflation rates in Akure, Nigeria. Environs of Federal University of Technology Akure (FUTA) were chosen as a study area because of influx of investors in hostel development in the area. Data on rental and capital income were collected from registered and practising Estate Valuation Firms in the study area through self-administered questionnaire, while rates on inflation were obtained from Central Bank and Bureau of Statistics data bank in Nigeria. 25 Estate Valuation Firms in Akure consist of the target population sourced from the NIESV (Nigerian Institution of Estate Surveyors and Valuers) Directory. Twenty-five questionnaires were administered to Estate Valuation Firms, fifteen were retrieved. The descriptive statistics include the mean return while inferential statistics used for the analysis includes Phillip Perron unit root test and Auto regressive distributed lag. The PP unit root result; shows the data sets exhibits a different combination order in terms of the integrations. Existing degree of relationship was seen to vary between hostel and inflation rates. However, instances where some hostels show a positive relationship with inflation component exist; while others show a negative relationship with the inflation components. The findings from this study will give empirical direction to both individual and institutional investors in hostels. It was recommended among others that the Nigerian government should work towards putting in place the relevant policy mix of fiscal and monetary policies to mitigate inflation rate to a single digit so that investors will be able to earn their real return.

VECTOR AUTOREGRESSIVE APPROACH AFTER FIRST DIFFERENCING: A TIME SERIES ANALYSIS OF INFLATION AND ITS DETERMINANTS IN TANZANIA

The objective of the study was to examine the trend of inflation and its key determinants in Tanzania. We used secondary time series data observed annually from January 1970 to 2020 which are inflation rate, GDP, Exchange rate and money supply. The vector autoregressive (VAR) model was employed for modeling. Augmented Dickey-Fuller test (ADF) found that inflation rate, Gross Domestic Product (GDP), exchange rate and Money supply (M3) were initially non-stationary but they became stationary after first differencing so as to proceed with the analysis. Preliminary tests before obtaining vector auto regressive model were carried out before determining the relationship between the variables. Diagnostic test such as serial correlation, heteroscedasticity, stability and normality were also important to evaluate the model assumptions and investigate whether or not there are observations with a large, undue influence on the analysis. We used Granger causality test (GCT) to determine causal- effect relationship between the variables. The results show that, there is a long run relationship between the variables, also the results showed that exchange rate and money supply (M3) both have a positive impact on inflation rate while gross domestic product (GDP) revealed a negative impact on inflation rate. Finally, the forecast of inflation rate for 15 years ahead was performed. The study recommends that the government should pursue both contractionary monetary policy and fiscal policy in order to control inflation in the country.

Investment appraisal: Akwaaba university hostel project

Learning outcomes After completing this case, students should be able to: identify and compute relevant cash flows in relation to a real estate project and compute the net present value (NPV). Determine the target return or cost of capital (by looking at historical economic indicators). Design or formulate a sensitivity analysis to determine the drivers of the project value. Evaluate real estate and other investments taking qualitative and quantitative factors into consideration. Demonstrate the computation of a break-even rate to determine the minimum or maximum revenue or cost required for a project to be viable. Case overview/synopsis This case study is about the Golden Beak Securities Pension Fund that wanted to invest in a Hostel Project in one of the universities in Ghana. Most universities in Ghana faced an acute shortage of on-campus accommodation. Also, the Government of Ghana, in 2017, implemented a programme to make Senior High School in Ghana free. This was expected to increase the number of students who will enter the existing universities. The project was therefore seen as strategic, as it would help ease the pressure of on-campus accommodation while providing diversification for the pension fund. As part of the investment committee’s (IC) quest to improve the skill set available to it, especially in relation to real estate investments, Esi Abebrese was appointed as one of the members of the IC of GSB. Her main task was to collect information on key macroeconomic variables, as well as granular information on project costs and revenues and conduct investment appraisal. Esi was scheduled to make a presentation to the IC on the 15th of October 2019 following which the Committee will debate and make a decision. The project had an estimated cost of GH¢52m with a total number of 3,424 student beds and ancillary facilities. Undertaking the project required moving funds from investments in money market securities with one of the banks in Ghana. The investments in the money market securities were currently yielding about 16% a year. The determination of the cost of capital was critical and Esi and Nana eventually settled on a long-term weighted average cost of capital of 14%. This was after considering the trend of inflation, monetary policy rates, treasury rates, stock market returns and a report on returns on commercial real estate properties in Ghana. An exit capitalisation rate of 20% was also estimated for the purposes of determining the value of the property at the end of the investment horizon. Esi also obtained estimates of cost and revenue for the project and proceeded to carry out a feasibility analysis on the project. This consisted of an NPV analysis and sensitivity analysis on various factors to determine the drivers of the project value. The IC had to take several factors (both quantitative and qualitative) into consideration before making a decision. Esi believed that these factors included the diversification of the fund’s assets, the return on investment, potential oversupply of hostel accommodation, the social responsibility of providing student accommodation and the impact of any prolonged shutdown of the university. Complexity academic level Masters/advanced undergraduate. Supplementary materials Teaching Notes are available for educators only. Please contact your library to gain login details or email support@emeraldinsight.com to request teaching notes. Subject code CSS 1: Accounting and Finance.

Inflation trends in Asia: implications for central banks

Abstract This article shows that trend inflation estimation offers crucial insights for the analysis of inflation dynamics and long-term inflation expectations. Focusing on the 12 largest Asian economies, a sample comprising both advanced and emerging economies and different monetary policy regimes, we show that trend inflation analysis can help explain the different impact of the disinflationary shocks across countries. Among countries with inflation below target in recent years, in those with trend inflation low but constant (Australia, New Zealand) low inflation may be lasting, but temporary, while those in which trend inflation has declined (South Korea, Thailand) risk low inflation to become entrenched and a de-anchoring of expectations. Countries like India, Philippines, and Indonesia instead experienced a moderation in inflation and lower trend inflation, while others (China, Taiwan, Hong Kong SAR, Malaysia) were impacted very mildly. That diverse international evidence offers important insights for central banks worldwide.

Measuring food inflation during the COVID-19 pandemic in real time using online data: a case study of Poland

PurposeThe purpose of this study paper is to focus on developing novel ways to monitor an economy in real time during the COVID-19 pandemic. A fully automated framework is proposed for collecting and analyzing online food prices in Poland. This is important, as the COVID-19 outbreak in Europe in 2020 has led many governments to impose lockdowns that have prevented manual price data collection from food outlets. The study primarily addresses whether food price inflation can be accurately measured during the pandemic using only a laptop and Internet connection, without needing to rely on official statistics.Design/methodology/approachThe big data approach was adopted to track food price inflation in Poland. Using the web-scraping technique, daily price information about individual food and non-alcoholic beverage products sold in online stores was gathered.FindingsBased on raw online data, reliable estimates of monthly and annual food inflation were provided about 30 days before final official indexes were published.Originality/valueThis is the first paper to focus on measuring inflation in real time during the COVID-19 pandemic. Monthly and annual food price inflation are estimated in real time and updated daily, thereby improving previous forecasting solutions with weekly or monthly indicators. Using daily frequency price data deepens understanding of price developments and enables more timely detection of inflation trends, both of which are useful for policymakers and market participants. This study also provides a review of crucial issues regarding inflation that emerged during the COVID-19 pandemic.

Flattening of the Phillips Curve with State-Dependent Prices and Wages

Abstract We study monetary transmission in a model of state-dependent prices and wages based on ‘control costs’. Stickiness arises because precise choice is costly: decision makers tolerate errors both in the timing of adjustments, and in the new level at which the price or wage is set. The model is calibrated to microdata on the size and frequency of price and wage changes. In our simulations, money shocks have less persistent real effects than in the Calvo framework; nonetheless, the model exhibits a substantial degree of non-neutrality, driven mainly by wage rigidity. State-dependent nominal stickiness implies a flatter Phillips curve as trend inflation declines, because price and wage adjustments become less frequent, making short-run inflation less reactive to shocks. Our model can explain almost half of the observed decline in the slope of the Phillips curve since 2000.

Evaluation of the maintenance level within the ambits of budgetary provisions in universities

This research was therefore, aimed at evaluating the level of maintenance within the ambits of budgetary provisions in Universities. The methodology involved survey design, review of related literature, questionnaires, direct observations and interviews. The sample techniques involved both purposive and stratified random sampling applied on a population of 1300 staff, students and 84 buildings respectively. Data was analyzed using frequencies, percentages and mean scores. Pearson correlation coefficient, regression analysis and student t-test were employed in testing the hypotheses. Results revealed that maintenance of buildings in the institution is not effective. The research concluded that lack of building maintenance, funding and management decision play an important role in the physical condition of buildings which in turn affect staff productivity and students’ academic achievement. The study recommends among others regular annual budgetary allocation to building maintenance; review the budgets from time to time to accommodate inflationary trends and early release of funds. Management should explore other ways and means of generating and sourcing funds for maintenance as a result of restrictions on government subsidies to institutions.

Navigating housing affordability in Rwanda: Challenges and facilitation strategies

Housing and its affordability have, of recent, been of great concern to various stakeholders, especially in the developing world. Consequently, contributing aspects such as construction/tenancy costs, sustainability, environmental impact, and availability of credit facilities with a host of other factors, have dominated contemporary research. Various studies suggest that addressing affordable housing requires understanding the contextual factors that impact affordability of housing. Such studies have not been known to succinctly treat the context of Rwanda. This paper aimed at exploring the perspectives of housing affordability in Rwanda with a view of eliciting the status, challenges, and prospects. The objectives included description of the current status of housing, identifying the challenges of providing affordable housing, and proposals of strategies to enhance its provision. Data, such as for workers’ salary, costs of house construction, inflationary trends and the number of housing units per income group, were sought for and obtained either from the archives of various stakeholder organizations or by interviewing key officers concerned with housing. Descriptive statistics and thematic analyses were employed in analyzing the data in order to fulfil the objectives of the study. It was found that home ownership and tenure statistics varied, yet housing demand was on the rise. Foremost challenges, among others, were recorded to be scarcity and costly plots of land, compounded with costly building materials. In addition, the purchasing power of the local currency depreciated fast over time, thereby making good quality housing unaffordable for the majority of Rwandans. Localizing policy to enhance public awareness, resolving the issue of high cost of construction materials, and coming up with innovative interventions on land costs, were among the key strategies to facilitate housing affordability.

Nexus between Economic Phenomena and Growth Rate of Fishery Sector in Nigeria

Time series data that spanned from 1981-2019 sourced from CBN, FAO, and UNCTAD data banks were used to determine the growth of fishery sector in Nigeria. The obtained data was analyzed using the two-step methodology of Engel and Granger, Granger causality, and the impulse response function. The result showed evidence of co-integration between fishery GDP growth rate and the economic phenomena. Also, the GDP growth rate of the sector is efficient as it established a long-run equilibrium but the slow pace at which it corrects the distortion in its equilibrium makes the state of the efficiency to be a weak one. Furthermore, the fishery’s GDP growth rate is affected by high inflationary trend, red-tapism, and poor credit utilization. Empirical evidences showed that unexpected local shocks on the economic phenomenon will have a transitory effect on FGDP growth rate, thus will die-out over time. It was observed that the effect of the internal mechanism on the growth rate is passive while the external system effect is active on the growth rate. Therefore, the study recommends the need for policy strengthening by the concerned stakeholders viz: tiding of inflationary trend, red-tapism, and ineffective credit utilization, thus enhancing the growth of the sector.

Non-Linearities, State-Dependent Prices and the Transmission Mechanism of Monetary Policy

AbstractA sticky price theory of the transmission mechanism of monetary policy shocks based on state-dependent pricing yields two testable implications that do not hold in time-dependent models. First, large monetary policy shocks should yield proportionally larger initial responses of the price level. Second, in a high trend inflation regime, the response of the price level to monetary policy shocks should be larger and real effects smaller. Our analysis provides evidence supporting these non-linear effects in the response of the price level in aggregate US data, indicating state-dependent pricing as an important feature of the transmission mechanism of monetary policy.

Does Globalization Matter for Inflation in Pakistan? Empirical Evidence from Global Slack Hypothesis

This paper aims to evaluate the global slack hypothesis as well as to examine the impact of economic openness on the inflation trend and short-run Phillips curve. For this purpose, the study utilized the Auto Regressive Distributive Lag (ARDL) model to investigate how different measures of openness and global factors (global output and inflation) affect inflation over the period 1970 to 2018. In addition, we also investigate the effect of political regimes (1 for autocracy and 0 for democracy) on inflation and its various proxies in Pakistan. Unlike the existing work that has been done in Pakistan, this study has analyzed the global implications directly for inflation as well as the global slack hypothesis. Results indicate that trade openness is inflationary while financial sector development and the broad measure of openness which is the KOF index have had the opposite effect which might suggest the importance of other dimensions of globalization than trade only. One important finding is that the world output shock and world inflation directly transmit to Pakistan price inflation and in this sense, global factors along with economic openness have some association with inflation. The inclusion of political dummy variable has weaker explanatory power with negative sign maintaining that prudent macroeconomic policy during military regimes keep the inflation level lower. The empirical findings also suggest that although, the global slack hypothesis is validated its impact is not increasing over time. However, comparatively the global slack has dominated the domestic slack and in this sense, its importance has increased over time. Consequently, the process of globalization has important implications for inflation and its dynamics in Pakistan.

On the welfare implications of nominal GDP targeting

This paper examines the welfare implications of a nominal GDP growth targeting rule, a nominal GDP level targeting rule, and inflation targeting regime in a New Keynesian model featuring positive trend inflation, two measures of welfare, and both high and low growth environments. The paper finds that (i) in general, nominal GDP growth targeting dominates other rules with changes in all dimensions; (ii) nominal GDP growth targeting framework is superior to the level targeting regime for most scenarios; (iii) inflation targeting is preferred to nominal GDP level targeting regime, but to minimize short-run fluctuations, the latter is advantageous; (iv) nominal GDP level targeting may be desirable only in a low growth environment with both low inflation indexation and consumption equivalence criteria. The simulation results provide solid evidence to policy makers on the desirability of nominal GDP growth targeting.

Is euro area lowflation here to stay? Insights from a time‐varying parameter model with survey data

SummaryWe build a time‐varying parameter model that jointly explains the dynamics of euro area inflation and inflation expectations. Our goal is to explain the weak inflation during the post‐financial crisis economic recovery of 2013–2019. We find that the inclusion of survey data leads to a more muted decline of trend inflation in recent years and more economic slack. Moreover, the impact of economic slack and import prices on inflation has recently strengthened, and survey respondents updated their beliefs more actively over the financial crisis period. Our model compares well against restricted specifications in terms of forecast performance and marginal likelihood.