optimal state dependent rules credibility and inflation inertia abstract we use a state dependent model where pricing rules are optimal to examine the costs of a money based disinflation under various assumptions about the credibility of the policy change our analysis allows us to relate actual credibility and future inflation inertia to the asymmetry of the price deviation distribution an important implication of our state dependent setting is that disinflation can be attained without substantial cost even in a situation of low credibility provided that a mechanism of price alignment eliminates the asymmetry of the price deviation distribution we also develop an analytical framework for analyzing intermediate imperfect credibility cases

variance of agricultural prices industrial prices and money the relative uncertainty of agricultural prices and industrial prices with respect to the uncertainty of growth in the money supply are investigated utilizing multivariate arch and garch analysis the conditional variances of agricultural prices were shown to dwarf the variances of industrial prices and the money supply the relatively greater sensitivity of the conditional variance of agricultural prices to changes in the variance of the money supply than industrial prices found in this analysis provides a further perspective on the uncertainty confronting farmers including the impacts of the monetary policy shock that precipitated the farm financial crisis in the early 1980s

reinterpreting the role of inflation in politico economic models the author attempting to analyze the interplay between politics and economics is faced with a large number of problems ranging from an always too small and idiosyncratic data set to the lack of any generally accepted theory of the process which has testable implications my aims have been 1 to show that past studies have typically treated inflation in an extremely naive way disregarding the fact that it may have political pluses if unanticipated and 2 to test the sensitivity of established formulations to what i believe is the more useful view of voter behavior given in model ii since model i and model ii represent polar extremes of amnesiac and eidetic behavior tests of intermediate lag structures are clearly in order because of administration peculiarities however lost data points will pose a serious problem

inflation and relative price variability parks study reexamined the authors show that richard w parks 1978 widely cited evidence on the correlation between the rate of inflation and the variability of relative prices in the united states during 1948 75 depends on one observation 1974 when the sample period is extended through 1989 the correlation depends on the observations for 1974 and 1980 since both are years of large oil price shocks the authors make the case that causation is likely to run from these shocks to relative price variability and inflation with accommodating monetary policy playing a role copyright 1993 by ohio state university press

money supply announcements and interest rates another view in this paper i use a new approach to analyze the impact of money supply announcements on the bond market before 1980 the only available work on this subject consisted of a few unpublished papers by conrad 1978 sivesind 1978 and urich 1979 1 more recently published papers by grossman 1981 and urich and wachtel 1981 have appeared roley 1982 extends the grossman study to incorporate data after the federal reserve policy statement of october 6 1979 both grossman and urich and wachtel are primarily concerned with the question of money market efficiency using survey data made available by money market services of san francisco and data on treasury bill yields each finds that the market responds quickly to unanticipated changes in the money supply but that anticipated changes have no effect on interest rates in addition grossman finds that when he adds other variables such as past changes in the money

wage indexation and discretionary monetary policy since the early 1970 s both academic researchers and policymakers have devoted considerable attention to the macroeconomic effects of wage indexation however these two groups have focused on different effects starting with jo anna gray 1976 and stanley fischer 1977a formal models emphasize the role of indexation in stabilizing or destabilizing output in contrast informal policy discussions usually focus on the allegation that indexation is inflationary e g arthur okun 1971 mario simonsen 1983 eliana cardoso and rudiger dornbusch 1987 to reduce this gap this paper presents a model of the effects of indexation on inflation and asks whether indexation raises economic welfare when these effects are taken into account until recently it was difficult to formalize the argument that indexation is inflationary because economists lacked models of the sources of inflation this paper applies the insight of robert barro and david gordon 1983a that with discretionary policy the employment gains from surprise inflation tempt the monetary authority to create positive trend inflation as stressed by fischer and lawrence summers 1989 policies that reduce the costs of inflation such as indexation cause barro gordon policymakers to choose higher inflation indeed inflation can rise so much that welfare falls despite greater protection against inflation this effect is appealing because it captures the common argument that indexation weakens policymakers will to fight inflation 1 this is not the end of the story however because wage indexation has a second effect it reduces the employment effects of surprise inflation that is unlike most policies to reduce the costs of inflation such as indexation of interest rates wage indexation steepens the phillips curve in the barrogordon model a steeper phillips curve reduces the temptation to inflate and hence reduces equilibrium inflation since indexation has one inflationary effect lower costs of inflation and one anti inflationary effect a steeper phillips curve the net effect appears ambiguous even if the net effect on inflation is determined the welfare effect may remain unclear if inflation rises the welfare loss might or might not be outweighed by the lower cost of a given amount of inflation 2 these ambiguities cannot be resolved with the barro gordon model alone because the phillips curve and the effect of inflation on welfare are ad hoc it is plausible that indexation affects these relations but the relative strengths of the effects are unclear resolving the ambiguities requires a more structural model in which the effects of indexation are derived rather than assumed this paper studies such a model specifically we use a model of staggered wagesetting based on gray 1976 fischer 1977a b and john taylor 1980 the degree of indexation is an explicit parameter and so we can derive its net effects on inflation and welfare section i of this paper presents our basic model and derives equilibrium inflation in

why interest rates react to money announcements an explanation from the foreign exchange market abstract when the fed announces a money supply greater than had been expected interest rates rise why one explanation is that the market raises its estimate of the future rates of money growth and inflation and bids up nominal interest rates we offer contrary evidence on such days the dollar appreciates not depreciates an alternative explanation is that the market perceives the change in the money stock as a transitory fluctuation that the fed will reverse in the future the anticipated future tightening raises today s real interest rate causes a capital inflow and appreciates the dollar the result in fact observed

housing wealth and consumption growth evidence from a large panel of households this article uses a large panel dataset that tracks the housing wealth and credit card spending of 12 793 individuals in hong kong to study the relationship between housing wealth and household consumption i identify a significant effect of housing wealth on consumption a pure wealth effect can explain part of the sensitivity households with multiple houses have much stronger consumption responses consistent with a relaxation of the credit constraints mortgage refinancing significantly increases households consumption sensitivities however for the majority of the households that do not refinance consumption sensitivity appears to be due to a reduction in precautionary saving jel e21 g21

empirical measures of inflation uncertainty a cautionary note a direct ex ante measure of inflation uncertainty in the us is compared with a number of proxies used in empirical studies the direct estimate is the root mean subjective variance of the probability distributions for inflation reported by respondents to the asa nber survey the proxies include forecast standard deviations from arima arch and structural models of inflation these proxies are not significantly correlated with the direct measure nor with one another use of the proxies leads to incorrect inferences about the correlation between inflation and inflation uncertainty and between inflation uncertainty and the real interest rate

expected monetary changes and relative prices a look at evidence from the stock market at the heart of the natural rate theory is the assumption that fully perceived monetary growth is neutral with respect to relative price changes unfortunately there have been few attempts to test this assumption directly because the belief that active contracyclical monetary policies are not superior to friedman s constant growth rule rests upon the assumption that expected monetary changes have neutral relative price effects more evidence is needed on whether such changes are in fact neutral to this end we test the hypothesis that only the unexpected components and not the expected components of monetary changes affect relative price changes by looking at the stock market testing is done on a modification of the well known mean variance capital asset pricing model the capm specifically we modify the capm to allow for differential stock returns depending upon expected and unexpected monetary growth rates section ii explains the basic model used to test for non neutral relative price effects of monetary change section iii deals with the empirical definitions of expected and unexpected money growth section iv discusses the basic data while sections v and vi make neutrality tests of monetary growth using actual expected revisions in expected and unexpected money growths the last part summarizes the paper

stock market returns and inflation evidence from other countries this paper investigates the relation between common stock returns and inflation in twenty six countries for the postwar period our results do not support the fisher hypothesis which states that real rates of return on common stocks and expected inflation rates are independent and that nominal stock returns vary in one to one correspondence with expected inflation there is a consistent lack of positive relation between stock returns and inflation in most of the countries

relative price variability and inflation evidence from us cities we test whether the time series positive correlation of inflation and intermarket relative price variability is also present in a cross section of u s cities we find this correlation to be a robu

inflation inflation uncertainty and relative price dispersion evidence from bivariate garch m models abstract one potential real effect of inflation is its influence on the dispersion of relative prices in the economy menu cost models generally imply that higher trend inflation will increase price dispersion in contrast signal extraction models predict that increased inflation uncertainty will raise relative price dispersion existing empirical studies do not distinguish between these separate hypotheses we constuct a bivariate garch m model of inflation and relative price dispersion to test these differing explanations in a single model and find that inflation uncertainty dominates trend inflation as a predictor of relative price dispersion

daily monetary impulses and security prices this paper uses swiss data to study the real long run effects of monetary policy daily unexpected changes in the monetary base are found to be negatively correlated with security price changes this result is unaffected when implicitly following geske and roll 1983 we try to measure the autonomous component of monetary policy by taking into account a reaction function of monetary policy to changes in real variables

inflation and the distribution of price changes this paper reconsiders the empirical evidence connecting inflation to its higher order moments in particular we examine the statistical properties of the observed positive correlation between the sample mean and the sample cross sectional skewness of price changes this correlation has attracted substantial attention over the years and has recently been the focal point of a debate among macroeconomists we show that the sample mean skewness correlation suffers from a small sample bias that accounts for the entirety of the observed correlation in other words we establish that one of the stylized facts in the literature on aggregate price behavior need not be a fact at all

assessing the variability of inflation although there has been much argument over the impact of variable inflation rates upon economic performance there has been surprisingly little attempt to define the term variability of inflation carefully or to test proposed hypotheses connecting variability and the level of inflation precise definitions are given in the paper and a model is constructed showing that the level variability hypothesis may be formulated in terms of the presence of heteroscedasticity in a regression model this theoretical model is used to criticize existing studies while an empirical study with australian data illustrates the application of the approach

capital gains in japan their magnitude and impact on consumption this paper estimates the magnitude of net capital gains on household wealth in japan and then conducts an econometric analysis of their impact on consumption using national accounts data for the 1955 93 period it finds that net capital gains on household wealth have been sizeable albeit volatile in japan during this period and that their impact on consumption has been substantial especially during the late 1980s and early 1990s the econometric analysis is one of the first cointegration analyses of japanese consumption behavior and finds strong support for the life cycle permanent income hypothesis copyright 1996 by royal economic society

the relationship between the level and variability of inflation theory and evidence summary this paper emphasizes the role played by asymmetric stabilization policies in producing the widely reported positive association between the level and variability of inflation a simple theoretical model is constructed which shows how asymmetric policies give rise to this association the empirical findings presented provide support to the proposition that variations in inflation uncertainty are policy induced

relative price variability inflation and the allocative efficiency of the price system abstract this paper develops a theory of the relationship between aggregate and relative price variability based on the inability of people even in a rational world to identify permanent changes in relative demands whether caused by real or by monetary variability and relative productivities as soon as they occur the theory implies that the variance of the rate of inflation and the variance of relative price change are positively related although expectations are rational and markets always clear production decisions respond sluggishly to changes in relative prices temporary shocks to relative demands cause prolonged changes in the structure of production available information is used so as to maximize the efficiency of the price system however this efficiency decreases when any of the underlying variances increases this decrease is more pronounced when the production lag is longer

an ex ante view of household portfolio choice the role of expected capital gains this paper highlights an issue not previously addressed in portfolio balance modelling the impact of assetspecific expected capital gains on the composition of the household wealth portfolio we extend the brainard tobin portfolio choice model to incorporate the distinction between expected and unexpected capital gains and estimate two versions of the model while our specification is more appealing on a theoretical basis we were unable to distinguish clearly between the ex ante and ex post models given currently available data

the relationship between relative prices and the general price level it is very nearly a truismi amaong neoclassical economists that the public is wont to confuse changes in the general price level with relative price changes correspondingl y one might speak of the independence between the two as one of the central postulates of the neoclassical tradition william stanley jevons was aml ong the first to identify this basic dichotomin economic life as well as to attempt to explain the ordinary citizen s seenming incapacity to understand it

inflation price competition and consumer search technology abstract this paper studies an s s pricing model in the presence of inflation and price competition in search markets i present a model in which consumers search technologies can influence firms price setting price dispersion and the market structure the result obtained shows that although price competition among firms is intensified in markets where consumers search technologies are more efficient price inflation is counter intuitively more likely to increase the monopoly power and stimulate entry of firms in these markets the model also provides new empirical implications for firms price setting behaviors

inflation and labor market adjustment the implications of downward nominal and ex ante real wage rigidity and of wage contracting for the dispersion of relative wage changes in the presence of price inflation are examined rigidity implies that unexpected inflation will raise the variability of relative wage changes contracting implies unexpected inflation reduces variability using data on manufacturing industries for 1955 81 and on private nonfarm industries for1965 81 these hypotheses are studied the dispersion in relative wage cnanges is reduced by greater price inflation most of the reduction is a response to unexpected inflation expected inflation has little impact on dispersion these findings hold for subperiods within the sample and are robust to different choices of measures of price expectations including those of the livingston survey the survey research center household data and arma forecasts they stand in striking contrast to the commonly accepted result that price inflation is associated with greater dispersion of relative price changes they suggest that inflation reduces the ability of relative wages to signal disequilibria among labor markets this abstract was borrowed from another version of this item

monetary policy and long term interest rates an efficient markets approach abstract this paper is an application of efficient markets theory to analyze empirically the relationship of money supply growth and long term interest rates this approach has the advantage over calier research on this subject in that it imposes a theoretical structure on this relationship that flows easier interpretation of the empirical results as well as more powerful statistical tests on the interest of ascertaining the robustness of the results many different empirical tests are carried out in this paper and they uniformly do not support the preposition that increases in the money supply are correlated with declines in long rates

a note on the variability of inflation and the dispersion of relative price changes abstract the relationship between the variance of inflation and the variability of relative price changes is analyzed empirically a strong positive association is found for 1948 1969 and 1948 1975 application of chow s test indicates structural instability and granger s test suggests a feedback effect between these variables

an empirical analysis of expected stock price movements the livingston survey of economists forecasts of key economic variables has served as the data source for a number of studies investigating the forrnation and effects of expectations much of this work has utilized the price level predictions from the survey to proxy anticipated inflation l this measure of expected inflation has also been analyzed by several researchers to see if it conforrns to the notion of rational expectations with differing conclusions 2 this paper extends the analysis of the livingston data by examining the forecasts of common stock prices made by the individual survey participants since predicted movements in stock prices may play an important role in portfolio decisions and according to tobin s q model real investment decisions it seems useful to explore the characteristics of these forecasts the paper addresses two main issues first are the stock price predictions in accord with rational expectation forrnation second how are the respondents expectations of stock price movements related to their forecasts of inflation and real

on the real effects of short and long run inflation and relative sector price variability some empirical evidence using the kalman filter this paper evaluates empirically the effects of sector relative price variability and short run and long run inflation on the growth rate of real output in the united states since 1947 also permanent and transitory estimates are constructed to evaluate the effects of unanticipated movements in sector relative price on the growth rate of real output the results show a statistically significant inverse relationship beween the growth rate of real output and transitory sector relative price variability and anticipated long run inflation and a direct relationship between the growth rate of real output and unanticipated short run inflation

the relation between stock prices and inflationary expectations the international evidence this paper provides empirical evidence on the relation between stock returns and inflationary expectations for nine countries over the period 1971 80 the fisherian assumption that real returns are independent of inflationary expectations is soundly rejected for each major stock market of the world using interest rates as a proxy for expected inflation our data provide consistent support for the geske and roll model whose basic hypothesis is that stock price movements signal negative revisions in inflationary expectations finally a weak real interest rate effect was found for some of these countries

money supply announcements interest rates and foreign exchange abstract this paper presents a test of the joint hypothesis that money supply announcements affect the real interest rate and that changes in the real interest rate affect the exchange rate in the short run the test results are consistent with the joint hypothesis for example it is found that announcement of an unexpected jump in the money supply is accompanied by an increase in interest rates and an appreciation of the dollar if the rise in interest rates was entirely due to higher inflationary expectations the dollar should not appreciate

robustness of the relationship between price variability and inflation for us manufacturing we study the relationship between relative price variability and inflation in two different ways we first look at product class census unit values for five time periods between 1958 and 1982 and find evidence of a positive relationship between variability and inflation then we directly update the vining and elwertowski 1976 study for the period 1974 91 using individual commodity series from the bureau of labor statistics we conclude by discussing differences across industries in price stickiness

relative price variability and inflation abstract using italian data from 1954 to 1983 it is found that relative price variability and inflation are positively correlated only during the 1970s and the early 1980s when their relationship appears to be largely induced by movements in the oil price rather than by aggregate demand shocks this result is consistent with the findings of fischer 1981 fischer 1982 for the u s and germany although in contrast to the evidence for these two countries no relationship can be detected between unexpected inflation and relative price variability furthermore the comparison between the three countries provides substantial support for the hypothesis tentatively advanced by fischer 1982 that the correlation between relative price variability and inflation is enhanced by monetary accommodation of real shocks there is also evidence that in italy both variables have been considerably affected by exchange rate movements

crashes in real estate prices causes and predictability large swings in real estate prices that end in devastating crashes have been witnessed by many countries in the past two decades to curtail the damage of these crashes it is imperative that we understand their causes this study proposes a model that associates market crashes with periodically collapsing speculative bubbles unlike the conventional literature the identification of the bubble does not rely on assumptions about fundamentals but on some fingerprints of speculation these fingerprints theoretically may also serve as predictors of market crashes in practice however a number of factors may hinder the accuracy of the prediction

conditional relative price variance and its determinants open economy evidence from germany the authors present empirical tests of two hypothesis derived from an open economy version of the multimarket equilibrium model the first hypothesis holds that the conditional relative price variance is positively related to the variance of domestic monetary and foreign nominal and real shocks the second hypothesis claims a negative impact of an increase in conditional relative price variance on normal output in contrast to earlier studies the authors use direct measures of conditional relative price variance based on arch estimates the authors results show that both hypotheses are consistent with german data copyright 1991 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

conglomerate mergers as defense against the risk of relative price variability this paper studies the effects of the risk of relative price variability on the optimal structure of a firm s cash flows with an application of portfolio theory it is suggested that when relative price risk is greater it is optimal for the management to diversify at the margin and emphasize economies of scale or scope when the risk is smaller conglomerate mergers should therefore be positively associated with relative price risk given the variables affecting mergers as a whole empirical evidence is found to lend support to the theory the inflation rate explains conglomerate mergers even better which suggests that relative price risk may constitute another real resource cost of inflation

interpreting the correlation between inflation and the skewness of relative prices a comment on bryan and cecchetti large literature in macroeconomics has examined how the inflation rate is related to the distribution of relative price changes this work has established a striking fact there is a strong correlation between inflation and the skewness of this distribution when inflation is high the distribution of relative price changes is typically skewed to the right when inflation is low it is skewed to the left the oil shocks of the 1970s are one example of this phenomenon inflation rose while a few goods oil products experienced especially large relative price increases but the inflationskewness correlation is not just a result of oil shock years this fact holds for many time periods and many countries e g vining elwertowski 1976 and ball mankiw 1995 for the united states amano macklem 1997 for canada de abreu lourenco and gruen 1995 for australia bryan and cecchetti 1999 argue that this fact need not be a fact at all because of small sample bias if true this is an important claim it would eliminate an apparently robust stylized fact that might otherwise hold a clue to understanding the causes or effects of inflation we are not however convinced by bryan and cecchetti s assertion our goal in this note is to explain why on its face bryan and cecchetti s claim is puzzling their paper presents a model in which there is an underlying true distribution of price changes and the observed distribution is obtained by sampling a subset of these price changes they show that the skewness of the sample distribution may be correlated with the sample mean even if there is no skewness in the population distribution this model however does not capture the reality of how price indices are constructed it is not the case that there are a large number of sectors and the government computes the cpi by sampling a small number of them instead the government measures prices in all sectors of which there may be a small or large number depending on the level of disaggregation the observed correlation of the mean and skewness is based on the full population of sectors so small sample bias does not appear to be possible because the data used to construct price indices are comprehensive one cannot avoid the conclusion that the inflation skewness correlation is a fact 1 if the idea of small sample bias is not relevant here how should one interpret the numerical simulations presented by bryan and cecchetti the substance of their argument we believe is that it is easy to explain the correlation between inflation and skewness previous authors have worked hard to explain this fact ball and mankiw 1995 propose that this correlation can be explained with menu cost models of price adjustment while balke and wynne 1996 argue that it can be explained by a multisector real business cycle model by contrast bryan and cecchetti generate the inflation skewness correlation in a much simpler model although it would be wrong to interpret their results as showing that the correlation doesn t exist one could plausibly interpret them as showing that this correlation doesn t prove anything as they put it such statistics are not useful in distinguishing sticky from flexible price setting behavior in macroeconomic models to evaluate this argument it helps to step back and review the motivation behind the ball mankiw and balke wynne theories the starting point for these authors is the classical theory of price determination central to this theory is the classical dichotomy relative prices are determined by real factors and the aggregate price level is determined by monetary factors specifically if there are n sectors in the economy there are n 1 relative prices real variables such as shifts in demand and costs in the various sectors determine these n 1 prices using any good or combination of goods as the numeraire the aggregate price level is determined by the supply and demand for money this idea is summarized by the quantity equation mv 5 py the n 1 relative prices and the price level which equals the average of all nominal prices together determine the n nominal prices in this classical model there is no obvious reason that the behavior of the aggregate price level is related to the distribution of relative prices if m v and y remain constant then p is constant and any shifts in the distribution of relative prices do not influence the price level to explain the observed inflation skewness correlation one must explain how the economy differs from this classical baseline balke and wynne offer one story for the inflationskewness correlation in their model certain shocks to the economy generate both skewness in the relative price distribution and changes in aggregate output for instance when opec raised oil prices relative prices in energy related sectors rose by 50 or more balanced by smaller relativeprice decreases in the rest of the economy this generated

are expectations of inflation rational or is variation of the expected real interest rate unpredictable abstract the joint hypothesis developed and tested in this paper is that the nominal interest rate is a rational expectation of the real interest rate plus the inflation rate and that variation of the expected real interest rate is unpredictable on the basis of information used in the test this test is applied to quarterly data on three month united states treasury bills of 1954 to 1973 the information used in the tests includes besides past interest rates and inflation rates past growth rates of the source base the money supply and real gnp some of the tests allow for a positive marginal tax rate which changes the results little the hypothesis is generally consistent with the data which provides support for the proposition that predictable changes of the money supply do not affect expected real interest rates over periods as short as a quarter

market response to the weekly money supply announcements in the 1970s the hypothesis that the weekly announcement of the money supply affects interest rates is examined the announcement effect is interpreted as a policy anticipation effect that is an unanticipated increase in the money supply leads to an increase in interest rates in anticipation of future tightening by the federal reserve estimates of this effect with proxies for the unanticipated change constructed from a survey of money supply forecasts and an arima model indicate that a financial markets respond very quickly to the announcement and b the response was largest when policymakers emphasized the importance of the monetary aggregates financial market participants are careful observers of the weekly money supply announcement and generally agree that the announcement often leads to changes in interest rates this occurs because the announcement leads market participants to revise their expectations both of future federal reserve policy actions and of future economic conditions in this paper we examine the response of yields on treasury bills to the announcement of the money supply and the extent to which that response has varied in the last ten years money supply announcements may affect market interest rates in three ways first actual expansion of the money supply leads to lower interest rates through a liquidity effect however rapid monetary growth which is not anticipated leads market participants to expect the federal reserve to counteract such growth in the future as a consequence there may be a policy anticipation effect which causes higher interest rates in anticipation of future tightening furthermore prolonged rapid monetary growth also creates inflation and inflationary expectations which lead to higher interest rates thus there may exist a third effect the inflationary expectations effect which also leads to higher interest rates our interest in this paper is in the immediate market response to the weekly announcement of the money supply which as we argue below is most likely to be a policy anticipation effect the policy anticipation effect is best described by example suppose that the announced change in the money supply exceeds that which was expected by

privatization and changes in welfare costs of inflation the case of entel argentina abstract in a country with permanent deficit driven inflation problems the proceeds from privatization may translate into potential reductions of the seigniorage needed to finance a given a level of government expenditure the changes in welfare costs of inflation brought about by divestiture are quantified in a monetary model in an argentine case study these changes were found to be small both in terms of gdp and as a percentage of seigniorage revenue within the model this is mainly explained by the low values encountered for the elasticities of money demand with respect to expected inflation and by the exclusion of considerations about unanticipated inflation

on inflation and real price variability this paper studies the consequences of costly price adjustments for the variability of real prices accompanying inflation for constant elasticity demand and cost of production it is shown that a higher demand a lower cost of production or a lower cost of price adjustment leads to less intertemporal variability of real prices if the marginal cost of production does not increase too fast then the average real price is less than the real price that would prevail in the absence of inflation additionally a higher demand a lower cost of production or a lower cost of price adjustment leads to a higher level of real prices

inflation and relative price variability in yugoslavia abstract granger causality tests show that inflation granger causes relative price variability but the feedback relationship cannot be excluded

variability of inflation and the dispersion of relative prices evidence from the chinese hyperinflation of 1946 1949 abstract this paper uses data from the chinese hyperinflation of 1946 1949 to focus on the relationship between the variability in the general price level and the dispersion in relative prices the issue is important because it bears on the natural rate hypothesis which supports the postulate that these two monetary variables are independent our results reinforce the bulk of previous evidence which suggests a positive correlation between the variation in inflation rate and the dispersion in relative prices during inflationary episodes

the worldwide change in the behavior of interest rates and prices in 1914 abstract this paper evaluates the role of the destruction of the gold standard and the founding of the federal reserve both of which occured in 1914 in contributing to observed changes in the behavior of interest rates and prices after 1914 the paper presents a model of policy coordination in which the introduction of the fed stabilizes interest rates even it the gold standard remains intact and it offers empirical evidence that the dismantling of the gold standard did not play a crucial role in precipitating the changes in interest rate behavior

monetary policy and short term interest rates an efficient markets rational expectations approach this paper is an application of efficient markets rational expectations theory to analyze empirically the relationship of money supply growth and short term interest rates a hotly debated issue in the literature this approach has the advantage over earlier research on this subject in that it imposes a theoretical structure that allows easier interpretation of the empirical results as well as more powerful statistical tests the empirical results uniformly do not support the proposition that increases in money growth are correlated with declines in short rates the relationship between money supply growth and nominal interest rates is a hotly debated issue in the literature one view associated with keynesian structural macromodels has an increase in money growth leading at least in the short and medium runs to a decline in interest rates 2 an alternative view associated with milton friedman 6 7 indicates that interest rates might rise in response to higher money growth because there is a rise in inflationary expectations and hence a rise in interest rates through a fisher 5 effect

real estate assets and consumer spending in an interesting contribution to this journal elliott 1980 shows that consumer spending is better explained if permanent income is estimated from explicit measures of wealth the wealth approach rather than current and past incomes the income approach in the income approach permanent income yp is computed as a distributed lag mechanism in the wealth approach this procedure is followed for labor income but permanent nonhuman income is specified as a constant multiple 72 of actual nonhuman wealth at the beginning of a period ant the distinction between income and wealth approaches is intuitively appealing and has been tried before elliott s equation 12 is the same as equation 5 in bhatia 1972 except that elliott uses actual wealth instead of bhatia s expected wealth the novelty in elliott s specification lies in considering different components of wealth which is also appealing because measures of wealth ranging from real money balances to broad aggregates of human and nonhuman wealth have been used in the literature elliott s most striking result that real assets mainly real estate and durable goods have no significant effect on consumer spending however is disturbing because real estate is a major household asset in fact the largest one in many years according to frb balance sheets 1983 and accrued gains on real estate have often been larger than gains on corporate equities during the last decade or two also there is some recent empirical evidence that gains on real assets significantly reduce personal saving peek 1983 the main purpose of this note is to reexamine and rehabilitate the role of real assets one can question elliott s specification which does not adequately allow for expected gains or his use of undistributed corporate profits as a contemporaneous proxy for all capital gains tenuous at best but the heart of the matter is the residential value series derived by elliott from perpetual inventory benchmarks pp 533 34 which being accumulations of construc

inflation and price setting in a natural experiment abstract we analyze the behavior of price setters in poland during the transition from a planned to a market economy using a large disaggregated data set the size and frequency of price changes as well as relative price variability all increase as inflation rises the effect of expected inflation on relative price variability is much stronger than the effect of unexpected inflation despite the unusual economic environment the results are qualitatively identical and quantitatively stronger than those in lach and tsiddon 1992 journal of political economy 100 349 389

unanticipated inflation and the value of the firm abstract evidence presented here indicates that the relationship between stock returns and unexpected inflation differs systematically across firms the differences are shown to be consistent with cross sectional variation in firms nominal contracts monetary claims and depreciation tax shields the differences are also partially explained by proxies for underlying firm characteristics that could create interaction between unexpected inflation and operating profitability finally much if not most of the differences appear to arise because unexpected inflation is correlated with changes in expected aggregate real activity the effects of which tend to vary across firms according to their systematic risk

inflation expectations revisited this paper describes the construction and main features of a new monthly time series for the mean and standard deviation of consumer inflation expectations in the united kingdom in the years 1961 85 based on a number of consumer surveys this involves generalizing to four and five category tendency survey data the method used by j a carlson and m parkin 1975 to quantify the results of a three category tendency survey of inflation expectations the new series exhibit very different time series properties from the original carlson parkin data copyright 1988 by the london school of economics and political science

relative price changes as aggregate supply shocks this paper proposes a theory of supply shocks or shifts in the short run phillips curve based on relative price changes and frictions in nominal price adjustment when price adjustment is costly firms adjust to large shocks but not to small shocks and so large shocks have disproportionate effects on the price level therefore aggregate inflation depends on the distribution of relative price changes inflation rises when the distribution is skewed to the right and falls when the distribution is skewed to the left we show that this theoretical result explains a large fraction of movements in postwar u s inflation moreover our model suggests measures of supply shocks that perform better than traditional measures such as the relative prices of food and energy

market perceptions of federal reserve policy and the weekly monetary announcements abstract in october 1979 the federal reserve altered its operating procedures emphasizing control of the growth rate of the money stock was the fed able to gain credibility in the market the paper investigates this question by examining the reactions of spot and expected future exchange rates foreign interest rates and long run domestic forward interest rates to the weekly federal reserve announcements of m l both before and after october 1979 the empirical evidence points out that the fed did gain credibility but was unable to establish full credibility the market reactions are consistent with the hypothesis that market participants attached a positive probability to the event that the fed may at some point in the future abandon its money stock targets

a proposition on short run departures from the law of one price unanticipated inflation relative price dispersion and commodity arbitrage abstract this paper proposes an explanation of short run departures from the law of one price based on the characteristics of the inflationary process and changes in the distribution of relative prices unexpected inflation gives rise to volatility of relative prices the more unexpected and hence uneven the rate of inflation the greater the difficulty in discerning from a given structure of relative prices commodity arbitrage opportunities which may be expected to persist and those transient opportunities which do not warrant a firm s incurring fixed costs of arbitrage an illustration portrays a risk averse firm confronting an international arbitrage opportunity

market structure and price flexibility abstract the relationship between market form and price adjustment patterns is examined by using disaggregated price data for mexico over the 1940 1984 period frequency of price adjustment and characteristics of goods and industries appear to be related as predicted by menu cost and customer market models the pattern of response followed by individual prices to inflationary shocks is related to their frequency of price adjustment the typical pattern of response to small and large shocks may differ contrary to predictions based on models with overlapping contracts in addition the empirical results have implications for the relationship between inflation and relative price variability

balance of trade announcements and asset prices influence on equity prices exchange rates and interest rates abstract this paper examines the informational impact of traded balance announcements on asset prices including equities currrencies long and short term debt instruments and financial futures this study finds that in the 1980s prior to the 1985 plaza agreement for international economic cooperation information in trade balance announcements seem to have influenced only interest rates however in the 1985 1987 period such announcements also influenced stock prices and currency values these influences intensity further in the 1987 1988 period thus asset prices are sensitive to news in trade balance announcements and this sensitivity seems to have increased significantly in recent years with important implications for asset pricing models and economic policy formulation jel f30

dispersed communication by central bank committees and the predictability of monetary policy decisions the paper asks whether members of central bank decision making committees should communicate with the public in a collegial manner by conveying the consensus or majority view of the committee or in an individualistic way by providing the diversity of views among the committee members it finds that more active as well as more consistent communication by committee members improves the predictability of monetary policy decisions significantly this effect is sizeable as communication dispersion across committee members accounts on average for one third to one half of the market s prediction errors of fomc policy decisions moreover more active and more consistent communication are found to also reduce the degree of uncertainty about the future path of interest rates these findings suggest that a collegial communication which stresses the consensus view on policy inclinations can enhance the effectiveness of central bank communication

indexation and the effect of inflation uncertainty on real gnp this article examines the combined effects of inflation uncertainty and indexation on the growth rate of real gross national product gn p the evidence suggests that greater indexation partially reduces t he adverse effect of inflation uncertainty on real gnp growth over time it also indicates that in contrast to earlier findings regarding th e effect of inflation uncertainty on employment the overall effect of inflation uncertainty on real gnp growth may be permanent a preliminary assessment of whether the discrepancy is the result of in flation uncertainty permanently affecting the growth rate of the capi tal stock is inconclusive copyright 1988 by the university of chicago

intercountry differences in the relationship between relative price variability and average prices this paper provides new evidence on the relationship between relative price variability and inflation the model uses a consistently defined data set for nine european countries it benefits from the inclusion and testing of the effects of macroeconomic variables and the incorporation into the measures of inflation and dispersion adjustments for timeliness appropriate formulas and proximity the general findings of an effect on relative price variability by the macroeconomic environment and negative coefficients on unexpected inflation are supported by their occurrence in models estimated by seemingly unrelated regression and a robust systems estimator

inflation and relative price variability short run vs long run abstract this paper uses recent developments in measuring correlation to examine the relationship between inflation and relative price variability rpv the results suggest that the positive correlation holds not only in the short run but also in the long run this finding has important implications for theoretical models that purport to explain this relationship such models must incorporate features that generate positive relationships that hold even in the long run

on the power of macroeconomic linkages to explain events in u s agriculture the significance for agriculture of macroeconomic events in the 1980s depends upon what elements in the macroeconomy are most strongly linked to agriculture and how these linkages function it is idle to say for example that inflation poses particularly serious problems for agriculture in the 1980s unless we have evidence that inflation generally causes particularly serious problems for agriculture this paper concentrates on the past literature and current state of evidence on such questions the final section considers the possibility of scientifically defensible forecasts for the 1980s it is short

wage indexation openness and inflation uncertainty the case of italy this article uses annual data of the italian economy to test the validity of the hypotheses of friedman 1977 and aizenman 1985 that the level of inflation uncertainty and the degree of openness of an economy have positive effects on the level of wage indexation it was found that the estimated wage indexation equation supports the validity of the aizenman hypothesis that the degree of openness of an economy has positive effects on the level of wage indexation on the other hand the regression of the wage indexation equation does not generally support the validity of the friedman hypothesis that the level of inflation uncertainty has positive effects on the level of wage indexation

neutrality of inflation in the agricultural sector abstract the paper considers the effect of inflation on the relative prices of products traded in auction markets prices of us agricultural products are used for the period 1951 1981 since agricultural products are widely traded the real forces of supply and demand specific to agriculture are represented by foreign agricultural prices the exchange rate is entered as a separate variable influencing domestic agricultural prices trade between the usa and the ten countries included in the federal reserve board s trade weighted dollar is considered the empirical results are consistent with the hypothesis that inflation did not alter relative agricultural prices when the real forces of supply and demand and the exchange rate are held constant

railroad rate deregulation and uncertainly of farm level prices for corn uncertainty of country elevator prices for corn in terms of error variance and mean squared forecast errors failed to increase in response to the deregulation in 1980 of railroad rates regression analysis was used to separate the uncertainty impacts of deregulation from those of other unanticipated changes in supply and demand factors influencing uncertainty included unexpected changes in storage costs export demand corn futures and rail car utilization some of the factors creating price uncertainty prior to deregulation were replaced by new uncertainty factors occurring as a result of deregulation

inflation uncertainty inflationary shocks and the credibility of counterinflation policy abstract this paper assesses the contributions of price shocks general price variability and the credibility of counterinflation policy to changes in inflation uncertainty in the u k uncertainty is measured by the root mean square error of consumer inflation forecasts in contrast to the assumptions of much theory uncertainty is not significantly affected by noise in individual or aggregate inflation rates factors which determine policy credibility are more important the political party in government the proximity of elections and under fixed exchange rates the rate of inflation itself however government initiatives to increase credibility through incomes policies and monetary targets have failed to reduce uncertainty

relative price dispersion aggregate price movement and the natural rate of unemployment this paper develops a model of relative price stickiness and examines its implications for the relationship between relative prices inflation and the natural rate of unemployment estimation of the model demonstrates that causality in the relationship between relative and aggregate prices runs in both directions however microeconomic disturbances have been the primary source of relative price change variance over the postwar period and these micro disturbances have exerted a strong effect on inflation in the short run it also is shown that micro relative price change dispersion has had a significant influence on the natural rate of unemployment

the out of sample forecasting performance of nonlinear models of regional housing prices in the us this article provides out of sample forecasts of linear and nonlinear models of us and four census subregions housing prices the forecasts include the traditional point forecasts but also include interval and density forecasts of the housing price distributions the nonlinear smooth transition autoregressive model outperforms the linear autoregressive model in point forecasts at longer horizons but the linear autoregressive and nonlinear smooth transition autoregressive models perform equally at short horizons in addition we generally do not find major differences in performance for the interval and density forecasts between the linear and nonlinear models finally in a dynamic 25 step ex ante and interval forecasting design we once again do not find major differences between the linear and nonlinear models in sum we conclude that when forecasting regional housing prices in the united states generally the additional costs associated with nonlinear forecasts outweigh the benefits for forecast

nominal contracting in a world of uncertainty abstract this paper evaluates corporate sensitivity to relative price risk and inflation risk and suggests how the existence of various nominal contracts particularly debt and forward contracts may modify firm behavior under uncertainty by differentiating between the two types of price risk this paper demonstrates the distinct risk reduction functions served by forward contracts and debt debt primarily protects against inflation risk whereas forward contracts can be used to protect against relative price risk complications arise however because forward contracts which are denominated in nominal terms also have an impact on the firm s degree of inflation risk

investment diversion and equity release the macroeconomic consequences of increasing property values the 1970s argument that investment in land and property diverted finance from productive investment in manufacturing is shown to be fallacious the seller of property at higher prices will recirculate that investment into productive sectors and arguments that the distinction between services and manufacturing is important are erroneous the 1980s argument that households are able to release their increased equity gain from house price inflation to finance consumption is the converse of this argument rising house prices will require potential buyers to save more in advance of purchase this paper argues that both lines of reasoning neglect the influence of rising property values on the rate of savings rising property prices lead people to believe their wealth to have increased and thus depress their level of savings and increase consumption this is seen as a particularly british problem because of the impact of land use planning restrictions on land supply and thus land prices and the recent shif

the choice of exchange rate regime and speculative attacks we develop a framework for studying the choice of exchange rate regime in an open economy where the local currency is vulnerable to speculative attacks the optimal regime is determined by a policymaker who trades off the loss from nominal exchange rate uncertainty against the cost of maintaining a given regime this cost is affected in turn by the likelihood of a speculative attack searching for the optimal regime within the class of exchange rate bands we show that the optimal regime is either a peg a zero width band a free float an infinite width band or a non degenerate finite width band the paper shows that lower costs of moving across currencies induce policymakers to set more flexible exchange rate systems this lowers ceteris paribus the likelihood of financial crises one implication is that a tobin tax does not necessarily reduce the likelihood of currency crises the paper also investigates the effects of country size openess variability in fundamentals and reputation on the choice of exchange rate regime the role of abrupt changes in reputation in triggerering crises even with unchanged fundamentals as an alternative to sunspots is discussed and illustrated

stock market wealth and consumption this paper explores the link between changes in the aggregate value of corporate stock and changes in consumer spending it presents data on the distribution of corporate stock ownership based on the 1998 survey of consumer finances it also uses time series evidence on the comovement of stock market wealth and various categories of consumer spending to calibrate the wealth effect it concludes that in the year after a change in stock market values consumer spending is likely to rise by between one and two cents for each dollar increase in the value of corporate stock

ideal divisia moments price dispersion and inflation abstract ideal divisia price and quantity index numbers are computed for 18 countries using per capita consumption data for the 1970 s correlation matrices of general price change and price dispersion are computed and determinants of price dispersion are analyzed

nonlinear impact of inflation on relative price variability using a half a century long disaggregated price data for 22 food products collected from 19 cities we show that the association between inflation and price variability is nonlinear with respect to changes in inflation rate we obtain similar results for expected and unexpected inflation