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"INFLATION RATES"
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The case against 2 per cent inflation : from negative interest rates to a 21st century gold standard
This book analyses the controversial and critical issue of 2% inflation targeting, currently practised by central banks in the US, Japan and Europe. Where did the 2% target inflation originate, and for what reason? Do these reasons stand up to scrutiny? This book explores these key questions, contributing to the growing debate that the global 2% inflation standard prescribed by the central banks in the advanced economies globally is actually contributing to the economic malaise of these nations. It presents novel theoretical perspectives, intertwined with historical and market understanding, and features analysis that draws on monetary theory (including Austrian school), behavioural finance, and finance theory. Alongside rigorous analysis of the past and present, the book also features forward looking chapters, exploring how the 2% global inflation standard could collapse and what would ideally follow its demise, including a new look at the role of gold.
Book
MEASURING THE LEVEL AND UNCERTAINTY OF TREND INFLATION
Firmly anchored inflation expectations are widely viewed as playing a central role for the conduct of monetary policy. This paper presents estimates of trend inflation, based on information contained in monthly data on realized inflation, survey expectations, and the term structure of interest rates. In order to assess whether inflation expectations are anchored, a time-varying volatility of trend shocks is estimated as well. While there is some commonality in inflation- and survey-based estimates of trend inflation, yield-based trend estimates embed a highly persistent component orthogonal to trend inflation. Trimmed-mean inflation rates and survey forecasts are most indicative of trend inflation.
Journal Article
Determinacy and Identification with Taylor Rules
The new-Keynesian, Taylor rule theory of inflation determination relies on explosive dynamics. By raising interest rates in response to inflation, the Fed induces ever-larger inflation, unless inflation jumps to one particular value on each date. However, economics does not rule out explosive inflation, so inflation remains indeterminate. Attempts to fix this problem assume that the government will choose to blow up the economy if alternative equilibria emerge, by following policies we usually consider impossible. The Taylor rule is not identified without unrealistic assumptions. Thus, Taylor rule regressions do not show that the Fed moved from “passive” to “active” policy in 1980.
Journal Article
Inflation Expectations, Real Rates, and Risk Premia: Evidence from Inflation Swaps
We develop a model of nominal and real bond yield curves that has four stochastic drivers but seven factors: three factors primarily determine the cross-section of yields, whereas four volatility factors solely determine risk premia. The model is estimated using nominal Treasury yields, survey inflation forecasts, and inflation swap rates and has attractive empirical properties. Time-varying volatility is particularly apparent in shortterm real rates and expected inflation. Also, we detail the different economic forces that drive short-and long-term real and inflation risk premia and provide evidence that Treasury inflation-protected securities were undervalued prior to 2004 and during the recent financial crisis.
Journal Article
Monetary Policy, Inflation Expectations and The Price Puzzle
This article re‐examines the VAR evidence on the price puzzle and proposes a new theoretical interpretation. Using actual data and two identification strategies based on zero restrictions and model‐consistent sign restrictions, we find that the positive response of prices to a monetary policy shock is historically limited to the sub‐samples that are typically associated with a weak interest rate response to inflation. Using pseudo data generated by a sticky price model of the US economy, we then show that the structural VARs are capable of reproducing the price puzzle only when monetary policy is passive. The omission in the VARs of a variable capturing expected inflation is found to account for the price puzzle observed in simulated and actual data.
Journal Article
Panel cointegration tests of the Fisher effect
Most empirical evidence suggests that the Fisher effect, stating that inflation and nominal interest rates should cointegrate with a unit slope on inflation, does not hold, a finding at odds with many theoretical models. This paper argues that these results can be attributed in part to the low power of univariate tests, and that the use of panel data can generate more powerful tests. For this purpose, we propose two new panel cointegration tests that can be applied under very general conditions, and that are shown by simulation to be more powerful than other existing tests. These tests are applied to a panel of quarterly data covering 20 OECD countries between 1980 and 2004. The evidence suggest that the Fisher effect cannot be rejected once the panel evidence on cointegration has been taken into account.
Journal Article
Were There Regime Switches in U.S. Monetary Policy?
A multivariate regime-switching model for monetary policy is confronted with U.S. data. The best fit allows time variation in disturbance variances only. With coefficients allowed to change, the best fit is with change only in the monetary policy rule and there are three estimated regimes corresponding roughly to periods when most observers believe that monetary policy actually differed. But the differences among regimes are not large enough to account for the rise, then decline, in inflation of the 1970s and 1980s. Our estimates imply monetary targeting was central in the early 1980s, but also important sporadically in the 1970s.
Journal Article
Trend Inflation, Indexation, and Inflation Persistence in the New Keynesian Phillips Curve
Purely forward-looking versions of the New Keynesian Phillips curve (NKPC) generate too little inflation persistence. Some authors add ad hoc backward-looking terms to address this shortcoming. We hypotehsize that inflation persistence results mainly from variation in the long-run trend component of inflation, which we attribute to shifts in monetary policy. We derive a version of the NKPC that incorporates a time-varying inflation trend and examine whether it explains the dynamics of inflation. When drift in trend inflation is taken into account, a purely forward-looking version of the model fits the data well, and there is no need for backward-looking components.
Journal Article
The Model Confidence Set
This paper introduces the model confidence set (MCS) and applies it to the selection of models. A MCS is a set of models that is constructed such that it will contain the best model with a given level of confidence. The MCS is in this sense analogous to a confidence interval for a parameter. The MCS acknowledges the limitations of the data, such that uninformative data yield a MCS with many models, whereas informative data yield a MCS with only a few models. The MCS procedure does not assume that a particular model is the true model; in fact, the MCS procedure can be used to compare more general objects, beyond the comparison of models. We apply the MCS procedure to two empirical problems. First, we revisit the inflation forecasting problem posed by Stock and Watson (1999), and compute the MCS for their set of inflation forecasts. Second, we compare a number of Taylor rule regressions and determine the MCS of the best regression in terms of in-sample likelihood criteria.
Journal Article
Soaring inflation in sub-Saharan Africa: A fiscal root?
The study investigates the effect of fiscal policy on the inflation rate in a panel of 44 sub-Saharan African (SSA) countries over the period 2003–2020 using a non-linear system generalized method of moments (system GMM) and the dynamic panel threshold estimation techniques. The results show that the recent increase in inflation rate has a fiscal nature and that monetary policy alone may not provide an effective response. Specifically, the results indicate that a positive shock to fiscal policy (captured by public debts) has a positive and statistically significant effect on inflation, while a negative shock to public debt has a statistically non-significant impact on the inflation rate. Also, money supply exerted a positive and insignificant impact on inflation, indicating that the current inflation rate in the region may not be induced by money supply. However, the joint effect of public debts and money supply shows that public debts aid the effect of money supply on the inflation rate, albeit, not in the proportion predicted by the quantity theory of money. Further, the results also found a public debt threshold point of 60.59% of GDP. This implies the current inflationary pressure may be rooted in fiscal policy and that further accumulation of public debts beyond the benchmark established in the study would worsen the inflationary pressure in SSA. Importantly, the study found that for fiscal policy to spur growth and reduce inflationary pressure in SSA, the inflation rate should be managed and brought within a single-digit framework of 4%. The research and policy implications are discussed.
Journal Article