inflation targeting what can the ecb learn from the recent experience of the bank of england establishment of the european central bank presents a rare opportunity to define the operations of a central bank without a prior track record this paper asks what might be learnt from the recent experience of inflation targeting at the bank of england before the ecb specifies an as yet undefined operational target we consider whether there should be single or multiple targets and which inflation measure should be used if at all if inflation is targeted then a forecast of its value becomes the intermediate variable this raises an issue of transparency and the compensating supply of information necessary to fill the gap but too much openness can also be problematic the ecb must be accountable and the contracting approach may be useful although being seen to say and do the same thing is ultimately most important opportunity presents itself to define the provisions for the structure and operation of a central bank without a prior historical track record some of these are already written into the statutes of the maastricht treaty which for example defines the ecb s primary statutory duty to be that of the pursuit of price stability and it has been the remit of the european monetary institute emi to make recommendations on other aspects critically however the terms of reference for the ecb in relation to an operational target for its monetary policy are yet to be resolved and although a statement from the ecb is expected to clarify the issue by september after this paper was finalised this need not be the end of the matter circumstances could well call for a subsequent recommendation the emi 1997 provisionally narrowed the choice to one between monetary targets and inflation targets since inflation targeting is the latest game in town it seems important to take stock of the experience of those newly independent central banks which have adopted it it is rather too soon to reach a definitive conclusion on the performance of inflation targeting central banks so what we consider are the lessons to be learnt from the mechanisms and structures that have been adopted by various inflation targeting central banks focusing in particular on the policies of the

why should central banks avoid the use of the underlying inflation indicator abstract this paper assesses the usefulness of the commonly used underlying inflation indicator in light of the criteria proposed in marques et al evaluating core inflation indicators mimeo 2001 empirical evidence for a group of six countries strongly suggests that the use of underlying inflation as an indicator of trend inflation should be avoided

reconsidering the relationship between inflation and relative price variability it has long been popularly believed that the relationship between inflation and relative price variability rpv is positive and stable using disaggregated cpi data for the united states and japan however this study finds that the relationship is neither linear nor stable over time the overall relationship is approximately u shaped around a nonzero threshold inflation rate rpv therefore changes not with the inflation rate per se but with the deviation of inflation from the threshold inflation rate more importantly the relationship is by no means stable over time but instead varies significantly in a way that coincides with regime changes of inflation or monetary policy the relationship was positive during the period of high inflation of the 1970s and the early 1980s as has been documented by a number of previous studies whereas it takes a u shape profile during the great moderation the results are robust to the use of core inflation which excludes the traditionally volatile prices of food and energy this paper then presents a modified version of the calvo type sticky price model to describe the observed empirical regularities simulation experiments show that the modified calvo model fits the data well and that the underlying relationship hinges upon the degree of price rigidity which is systematically related to inflation regime for countries and periods with low inflation rates the relationship takes a u shape as price adjustment is more sticky in a high inflation environment when price setting becomes more flexible the u shaped profile vanishes

do core inflation measures help forecast inflation abstract we conduct cointegration and granger causality tests for traditional and new measures of core inflation we find that both measures are consistent with desired properties of measures of underlying inflation but neither is very useful for forecasting purposes

labour market deregulation flexibility and innovation labour flexibility is often portrayed as important to competitive success using evidence from an original survey of uk firms this paper investigates the relationships between firms use of on the one hand various flexible work practices human resource management techniques and industrial relations systems and on the other hand the innovative activities of those firms our results suggest that the sort of low road labour flexibility practices encouraged by labour market deregulation short term and temporary contracts a lack of employer commitment to job security low levels of training and so on are negatively correlated with innovation

economic growth and multiskilled workers in manufacturing this article analyzes the causes of workers multiskill training and based on a survey of manufacturing plants and workers in korea concludes that multiskill capability arises from specific on the job training paid for by the firm i describe various aspects of multiskilled workers and set up a theoretical model in which multiskilled workers are assumed to be more productive than specialized workers for producing a new product but less productive for producing an existing product the model entails several implications including a positive cross sectional correlation between the proportion of multiskilled workers and the growth rate of labor productivity

menu costs and the long run output inflation trade off abstract in standard new keynesian models there exists an unlimited long run trade off between output and inflation but when we allow for an endogenous frequency of price adjustment this is replaced by an inverted u shaped relationship

a theory of ambiguity credibility and inflation under discretion and asymmetric information this paper develops a positive theory of credibility ambiguity and inflation under discretion and asymmetric information the monetary policymaker maximizes his own politically motivated objective function that is positively related to economic stimulation through monetary surprises and negatively related to monetary growth the relative importance he assigns to each target shifts stochastically through time his current preference trade off is known to him but not to the public when choosing the state contingent path of money growth for the present and the future the policymaker compares the benefits from current stimulation with the costs associated with higher future inflation expectations current monetary growth conveys information to the public about future money growth because there is persistence in the policymaker s objectives although expectations are rational information is imperfect because monetary control procedures are imprecise as a result the public cannot correctly distinguish persistent changes of emphasis on different policy objectives from transitory monetary control errors the public becomes aware of changes gradually by observing past monetary growth credibility is defined in terms of the speed with which the public recognizes changes in the objectives of the policymaker credibility is lower the noisier monetary control and the more stable the objectives of the policymaker looser monetary control and a higher degree of time preference on the part of the policymaker induce him to produce higher and more variable monetary growth when the policymaker is free to determine the accuracy of monetary control he does not always choose the most effective control available in spite of the fact that monetary surprises always have an expected value of zero the reason is that ambiguous control procedures enable the policymaker to generate positive surprises when he cares more than on average about economic stimulation he leaves the inevitable negative surprises for periods in which he cares more about inflation prevention this result provides an explanation for the fed s preference for ambiguity recently documented by goodfriend 1986 the policymaker is more likely to pick more ambiguous control procedures the more uncertain his objectives and the higher his time preference the paper also provides a theoretical underpinning for the well documented crosscountry positive correlation between the level and the variability of inflation

inflation measurement and the ecb s pursuit of price stability a first assessment as part of its monetary policy strategy announced in 1998 the ecb provided a quantitative definition of its price stability objective as an annual rate of increase in the harmonized index of consumer prices hicp of below 2 0 percent this paper takes a measurement perspective in evaluating the ecb s quest for price stability during the first years of monetary we consider the following questions first what is the hicp designed to measure and how accurate is it in terms of its stated objective second how accurate are the traditional exclusion type measures of core inflation derived from the hicp and more importantly is there evidence that less traditional measures of core inflation might be useful to the ecb and third is there any sense in which the ecb s definition of price stability in terms of a 2 0 percent limit on hicp inflation can be said to be too low from a measurement perspective we conclude that the conceptual underpinnings of the hicp remain sufficiently vague that it is difficult to compare with other indexes or come to any hard conclusions about its accuracy it is possible that the hicp is as susceptible to the biases that are known to affect other measures of inflation at the consumer or household level and if forced to quantify potential bias a point estimate of 1 0 percent strikes us as reasonable potential bias of this magnitude in conjunction with the inherent noisiness of the headline number and the well known aversion of central bankers to deflation argues for a modest upward redefinition of the rate of hicp inflation consistent with price stability finally we show that the ecb would be well served by increasing their use of nontraditional core inflation measures

an equilibrium analysis of relative price changes and aggregate inflation abstract inflation is positively correlated with the variability of relative prices as measured by the standard deviation of the cross section distribution of prices and also with the third moment skewness of the cross section distribution of prices the conventional interpretation of these relationships is that they reflect sluggishness in the adjustment of individual prices in response to shocks in this paper we question this interpretation first we show that similar correlations among the moments exist in alternative measures of underlying technology shocks second when these shocks are fed into a general equilibrium model with multiple sectors and flexible prices the resulting prices also display a positive correlation between aggregate inflation and skewness of the cross section distribution

permanent transitory decompositions and traditional measures of core inflation abstract the aim of this paper is twofold first after defining core inflation in line with the recent literature as the long run component of the rate of change of the consumer price index cpi we address the general problem of establishing a set of conditions under which given the assumption of inflation as an i 1 process it is possible to identify an indicator of trend inflation we show that some criteria recently proposed in the literature economics letters 75 2002 17 are unnecessarily restrictive second an empirical investigation for the period 1983 2001 reveals that these conditions are met in the us economy both for the traditional measure of core inflation which is obtained by subtracting food and energy components from cpi and for the weighted median of cpi proposed by monetary policy university of chicago press for nber 1994 261 these conclusions hold for a measure of core inflation based on the year on year rate of change of the core index and thus we provide some motivation for this choice

inflation and unemployment the world economy today is vastly different from the 1930s when seymour harris the chairman of this meeting infected me with his boundless enthusiasm for economics and his steadfast confidence in its capacity for good works economics is very different too both the science and its subject have changed and for the better since world war ii but there are some notable constants unemployment and inflation still preoccupy and perplex economists statesmen journalists housewives and everyone else the connection between them is the principal domestic economic burden of presidents and prime ministers and the major area of controversy and ignorance in macroeconomics i have chosen to review economic thought on this topic on this occasion partly because of its inevitable timeliness partly because of a personal interest reaching back to my first published work in 1941

a simple adaptive measure of core inflation this paper proposes a new measure of core inflation and compares it with several existing measures the new measure is adaptive and is designed to track sudden and persistent movements in inflation such as those arising from changes in monetary policy regimes the adaptive measure filters out transients more effectively than existing measures and it is a superior predictor of locally mean reverting components of inflation

survey measures of expected inflation and the inflation process the accuracy of inflation forecasts obtained from household and professional surveys has deteriorated noticeably of late to the extent that a simple autoregressive specification outperforms survey forecasts the decline in absolute and relative accuracy has taken place at about the same time as an apparent change in the inflation process projections of household forecasts on realized inflation suggests that households have not recognized this change for the professionals projections of expected inflation on headline inflation have changed but on core inflation have not by contrast projections of realized headline inflation on core have changed sharply

a theory of on the job learning in this paper the author assumes that a junior worker learns on the job from senior workers the worker s earnings are equal to his value of marginal product minus the tuition to his senior workers plus the teaching reward from his junior workers the slope of the experience earnings profile decreases with the employment growth rate the earnings of an inexperienced worker of an unusually large cohort tend to be higher than the normal level finally the author shows that his model generates an age earnings profile which is increasing concave in age and declining near to retirement copyright 1997 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

do underlying measures of inflation outperform headline rates evidence from australian data many central banks often focus on underlying measures of inflation when assessing inflation trends this paper compares the accuracy of underlying measures of inflation relative to the headline rates by using australia data it is found that the underlying measures did have smaller errors in predicting the long term trend in inflation than the quarterly headline rate due to the volatility in the headline rate as compared to the year ended headline rate the statistical test results however support only the measure of market prices excluding volatile items not the others there is some weak evidence of the weighted median measure outperforming the headline rate in the sub period after 1993 with respect to directional accuracy the test statistics cannot reject the null hypothesis of an equal probability correctly predicting the moving direction of the inflation trend though the headline rates have a higher probability

do core inflation measures help forecast inflation out of sample evidence from french data abstract this paper compares the ability of four indicators of underlying or core inflation to forecast inflation in the french case though most indicators granger cause inflation results from out of sample tests of forecast accuracy are less compelling the results nevertheless seem to give some empirical support to trimmed mean indicators

a core inflation indicator for the euro area this paper proposes a new core inflation indicator for the euro area obtained by cleaning monthly price changes from short run volatility idiosyncratic and measurement errors we use a factor model to project monthly inflation on a large panel of time series exploiting multivariate information we obtain a satisfactory degree of smoothing without using backward looking moving averages which induce a time delay in the signal the indicator forecasts inflation and is a useful tool for policy makers it outperforms other commonly used predictors at 6 months and longer horizons it tracks past policy interventions of the ecb

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

specific factors learning and the dynamics of trade in the postwar period the volume of trade among developed countries has increased at a much higher rate than gdp this article presents a dynamic general equilibrium model of trade between developed countries that accounts for this pattern of trade dynamics countries trade in goods that use good specific skilled labor and unskilled labor as factors of production specific skills are learned on the job and there exist positive effects in learning small initial differences in the distribution of experts in each country generate an increasing pattern of specialization over time knowledge spillovers across sectors are crucial determinants of the trade pattern

state dependent or time dependent pricing does it matter for recent u s inflation in the 1988 2004 micro data collected by the u s bureau of labor statistics for the cpi price changes are frequent every 4 7 months depending on the treatment of sale prices and large in absolute value on the order of 10 the size and timing of price changes varies considerably for a given item but the size and probability of a price change are unrelated to the time since the last price change movements in aggregate inflation reflect movements in the size of price changes rather than the fraction of items changing price due to offsetting movements in the fraction of price increases and decreases neither leading time dependent models taylor or calvo nor 1 st generation state dependent models match all of these facts some 2 nd generation state dependent models however appear broadly consistent with the empirical patterns

on the asymmetric u shaped relationship between inflation inflation uncertainty and relative price skewness in the uk we investigate the asymmetric relationships between aggregate inflation and the second and third moments of the cross sectional distribution of relative prices using a modified calvo pricing model with regime dependent price rigidities calibration experiments reveal that the inflation standard deviation and inflation skewness relationships exhibit u shaped asymmetries around the historical mean inflation rate uk sectoral data support our results we conclude that monetary policy should target an inflation rate proximate to the common minima of these nonlinear relationships and that core inflation measures should not be used for policy purposes as they exclude much of the information contained in the higher moments

economic analysis of foreign education and students abroad abstract the role of knowledge accumulation in economic growth has been well discussed in the literature by assuming the possibility of knowledge import by study abroad this paper presents a growth model of knowledge creation and import this paper also derives testable implications in three aspects of foreign education the choice of host countries by foreign students the number of students abroad from one origin country and the growth effect of foreign education in all these aspects empirical observations agree well with the predictions of the model

core measures of inflation as predictors of total inflation two rationales offered for policymakers focus on core measures of inflation as a guide to underlying inflation are that core inflation omits food and energy prices which are thought to be more volatile than other components and that core inflation is thought to be a better predictor of total inflation over time horizons of import to policymakers our investigation finds little support for either rationale we find that food and energy prices are not the most volatile components of inflation and that depending on which inflation measure is used core inflation is not necessarily the best predictor of total inflation however we do find that combining cpi and pce inflation measures can lead to statistically significant more accurate forecasts of each inflation measure suggesting that each measure includes independent information that can be exploited to yield better forecasts

a simple inflation indicator for the euro zone this article proposes and estimates an inflation indicator for the european monetary union emu this indicator is set up so that it is contemporarily not affected by the changes in price differentials among emu countries the results show that the monetary union index of consumer prices muicp which is the inflation measure that the european central bank ecb takes as a reference for monetary policy purposes could be understating the value of the inflation in the euro zone it is also concluded that regional peculiarities are fundamental in the evolution of prices in the different emu countries

inflation targeting and core inflation this paper examines the interaction of core inflation and inflation targeting as a monetary policy regime interest in core inflation has grown because of inflation targeting core inflation is defined in numerous ways giving rise to many potential measures this paper defines core inflation as the best forecaster of inflation a cross country study finds before the start of inflation targeting but not after core inflation differs between non inflation targeters and inflation targeters through conditional regressions inflation expectations as measured by core inflation have not changed with the advent of inflation targeting nor do they differ from non targeters jel classification e52 and e31 cible de maitrise de l inflation et inflation sous jacente ce texte examine l interaction entre l inflation sous jacente et l utilisation de cibles de maitrise de l inflation dans un regime de politique monetaire l interet pour l inflation sous jacente a crua proportion que l utilisation de cibles a cru l inflation sous jacente est definie de bien des manieres et se prete a plusieurs mesures potentielles ce texte la definit comme le meilleur predicteur de l inflation une etude transversale de plusieurs pays revele que l inflation sous jacente differe entre les pays qui ont des cibles et ceux qui n en n ont pas avant qu on commence a cibler mais pas apres via des regressions conditionnelles on montre que les anticipations d inflation telles que mesurees par l inflation sous jacente n ont pas change avec l arrivee du ciblage et qu elles ne different pas de celles des pays qui ne ciblent pas

the in house contracting paradox flexibility control and tension summary this study argues that the coordination of workplace changes brought about by increased flexibility attained through the utilization of contract labor is fraught with tension which influences the ways in which employment relationships are shaped in the context of any given firm the essence of such tension lies in the pursuit of organizational flexibility and quality control in the production process contradictions arise out of the attempt of user firms to avoid direct responsibility for the workforce while at the same time exerting managerial control over externalized contract workers such tensions and paradoxes are associated with conflicts of interest and compromise between and within workplace actors

conditional volatility skewness and kurtosis existence persistence and comovements abstract recent portfolio choice asset pricing value at risk and option valuation models highlight the importance of modeling the asymmetry and tail fatness of returns these characteristics are captured by the skewness and the kurtosis we characterize the maximal range of skewness and kurtosis for which a density exists and show that the generalized student t distribution spans a large domain in the maximal set we use this distribution to model innovations of a garch type model where parameters are conditional after demonstrating that an autoregressive specification of the parameters may yield spurious results we estimate and test restrictions of the model for a set of daily stock index and foreign exchange returns the estimation is implemented as a constrained optimization via a sequential quadratic programming algorithm adequacy tests demonstrate the importance of a time varying distribution for the innovations in almost all series we find time dependency of the asymmetry parameter whereas the degree of freedom parameter is generally found to be constant over time we also provide evidence that skewness is strongly persistent but kurtosis is much less so a simulation validates our estimations and we conjecture that normality holds for the estimates in a cross section setting we also document covariability of moments beyond volatility suggesting that extreme realizations tend to occur simultaneously on different markets

weighted median inflation is this core inflation this paper investigates core inflation defined as the best predictor of inflation i compare forecasts obtained using the mean weighted median trimmed mean and less food and energy inflation rates for the consumer price index and the personal consumption expenditure deflator for the current u s monetary policy regime another issue addressed is that of the systematic bias that exists due to the differences in means of these measures i test whether correcting for this bias can lead to better inflation forecasts this paper finds that adjusting for bias improves forecasting and that the weighted median is a better forecaster than the alternative measures and thus is a good measure of core inflation

inter capital relations and the network organisation redefining the work and employment nexus the blurring of organisational boundaries associated with networks of organisations suggests the need to reconsider how work and employment are shaped by shifting inter capital relations traditional theories of the internalised employment relationship understate its inter relationship with both the form of inter capitalist competition and the type of inter capitalist production relations also existing theories of inter organisational contracting do not adequately address how these are shaped by employment relations both within and between organisations an alternative approach provides a new perspective for considering forms of countervailing power to protect workers interests in a capitalist system continuously shifting from integrated to non integrated forms copyright 2005 oxford university press

price adjustment and market structure abstract this paper shows how the extent of price inertia depends on the form of market competition we first establish that the speed of price adjustment depends on the curvature of the profit function in the region around the optimum price we then show how this depends on market structure we prove the following results 1 1 the speed of price adjustment depends positively on the price elasticity of demand 2 2 the speed of price adjustment depends positively on the number of firms in a market and 3 3 the speed of price adjustment depends negatively on the degree of collusion between firms

market power price adjustment and inflation we study the responses of real and nominal prices to random flutuations in costs and money growth using a monetary search economy in which there are no costs or temporal restrictions on sellers ability to change prices the economy exhibits a form of price stickiness in that the price level may react incompletely to either type of shock as a result of endogenous changes in the average mark up driven by movements in consumers search intensity the average mark up falls as inflation rises a finding consistent with emprical observations as a result of this reduction in market power prices become more responsive to shocks as inflation rises our results are consistent with empirical findings that the degree of price adjustment in response to both cost and money growth shocks is increasing in the average rate of inflation that the variance of inflation increases with its average level and that positive and negative shocks to money growth have asymmetric effects