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.     

OUTPUT EFFECTS OF INFLATION WITH FIXED PRICE– AND QUANTITY–ADJUSTMENT COSTS

This article examines how the aggregate production varies with inflation when there are fixed price– and quantity–adjustment costs. It shows that such variation is determined by the elasticity of the firms’ marginal real revenue with respect to demand. The aggregate production decreases with inflation if this elasticity always exceeds minus unity, whereas the aggregate production increases with inflation if the elasticity is always less than minus unity. The aggregate production is independent of inflation in the special case that the elasticity always equals minus unity. The latter occurs if demand is derived from a log‐quadratic utility function. (JEL E31)     

UNANTICIPATED MONEY GROWTH AND OUTPUT FLUCTUATIONS

A rational expectations model is developed in which prices are fixed during a period. The implications of this model are that output fluctuations are correlated with unanticipated aggregate demand but not with unanticipated inflation. Empirical tests of the model indicate that the persistence of business cycles cannot be explained solely by unanticipated aggregate demand .     

AGGREGATE PRICE SHOCKS AND FINANCIAL INSTABILITY: A HISTORICAL ANALYSIS

This article presents evidence on the relationship between price and financial stability. We construct an annual index of financial conditions for the United States, 1790–1997, and estimate the effect of aggregate price shocks on the index using a dynamic ordered probit model. We find that price-level shocks contributed to financial instability during 1790–1933 and that inflation rate shocks contributed to financial instability during 1980–97. The size of the aggregate price shock needed to alter financial conditions depends on the institutional environment, but we conclude that a monetary policy focused on price stability would contribute to financial stability.     

INFLATION, HEDGING AND THE DEMAND FOR MONEY: SOME EMPIRICAL EVIDENCE

This paper explores the role of nominal rate of return uncertainty and inflation hedging as potentially important factors explaining the pattern of money demand. Using U.S. quarterly data over the period 1952.2–1982.4, it is shown that in conformity with theoretical considerations the nominal rate of return uncertainty variable tends to have a significantly positive effect and the inflation hedging variable (the covariance between nominal rate of return and inflation rate) a significantly negative effect on the demand for money. These findings seem to be reasonably robust in terms of various definitions of income, interest rates, inflation rate and money variables as well as in terms of different estimation methods.     

MODELING MONETARY TRENDS IN ITALY USING HISTORICAL DATA: THE DEMAND FOR BROAD MONEY 1861—1990

In this paper we estimate a stable demand for money relationship for Italy using a long series of historical data. We extend previously available data sets to obtain a sample for the years 1861 to 1990 and use cointegration analysis and two-stage estimation procedures to obtain a dynamic model for M2 demand. By employing a small number of explanatory variables and a nonlinear error-correction model we find a stable demand for money relationship. Our model incorporates significant inflation and interest rate effects, in contrast to previous studies of this type.     

Poverty and the business cycle: A regional panel data analysis for Spain using alternative measures of unemployment

Conventional wisdom predicts that changes in the aggregate unemployment rate may significantly affect a country’s income distribution and, consequently, have a relevant impact on the evolution of its poverty rate. However, the relationship between labour macroeconomic indicators and poverty seems to have become weaker recently. Using panel data on unemployment and poverty for Spanish regions, we estimate a system GMM model to model this relationship using alternative measures of the unemployment rate. We also test the hypothesis of asymmetric effects of the business cycle on the share of poor individuals in the population. Our results show that unemployment has a positive impact on severe poverty, while inflation has a negative effect. We also highlight the extent to which results differ when alternative intra-household unemployment distribution-sensitive measures are considered. Regarding the existence of asymmetric business cycle effects on severe poverty, our results show that despite the fact that the Great Recession has had a strong and positive effect on severe poverty, the effects of expansions and recessions on poverty are not significantly different.     

A POSITIVE THEORY OF INFLATION AND INFLATION VARIANCE

Empirically, inflation and the variance of inflation are positively associated. This paper develops a model that provides a potential explanation for this relationship in tern of the incentives facing the policymaker in a "discretionary equilibrium." The model can also account for an empirical association between inflation and measures of real output instability. There is, however, no direct causal link whatever from the average rate of inflation to either the variance of inflation or that of real output.     

The differential impact of inflation on key societal interest groups and public policy implications

An inflation problem exists when there is a perceived negative imbalance in the input-output position of a particular group. In this article the inflation problem is disaggregated by type of input-output imbalance, by degree of severity of the imbalance, and by vested interest group. The disaggregated model captures the inverse relationship between price changes and the inflation problem for subgroups, and the duality of the impact of price changes on particular subgroups. The empirical specification of the model makes explicit the diverse and often conflicting impacts of inflation on various subgroups. It is argued that macroeconomic policy makers often implement the wrong type of anti-inflation measures at the wrong time. The proposed input-output model provides a rationale and a framework for implementing microeconomic, targeted policies. With targeted policies, we can attempt to remedy particular inflationary problems without adversely affecting prosperous components of the economy.     

An empirical critique of the Lucas critique

This study provides a quantitative review of the empirical literature on the Lucas critique. Although there is great dissonance concerning the Lucas critique, our meta-analysis revealed how the apparent applicability of the Lucas critique may be attributed to misspecification and the manner in which expectations are treated. When models with questionable specification are discounted, empirical support for the Lucas critique vanishes.     

THE COMPOSITION AND CONSTRUCTION OF MONETARY AGGREGATES

An economic monetary aggregate is composed from a set of monetary goods that are at least weakly separable from other goods in the optimizing agent's utility function. We construct such an aggregate using a Divisia index number. We demonstrate that through the middle of the 1980s forecasts of the inflation rate based on our economic monetary aggregate are superior to forecasts based on the simple sum monetary aggregates M1 or M2.     

The effects of income and inflation on personal satisfaction: Functional measurement in economic psychology

Controlled experimental designs and functional measurement procedures were used to study how people perceive the effects of changes in major economic variables. In experiment I one group of subjects rated economic well-being and another group of subjects rated personal satisfaction for a variety of economic scenarios described by variations in salary, rate of increase in salary (annual raise), and annual rate of inflation. Stimulus interaction effects were found for each response scale showing that there is not a simple subtractive relationship between wage gains and inflation in determining perceived economic impact. Experiment 2 further investigated the interactive effects of raise and inflation on personal satisfaction. Results were discussed in terms of two complementary psychological processes: a “negativity effect” whereby unfavorable levels of raise and inflation have disproportionate weight, and a comparison of raise and inflation rate whereby personal satisfaction is incremented disproportionately when raise changes from below the inflation rate to above the inflation rate. Psychological concepts revealed in this study were related to economic concepts of “elasticity of demand” and “money illusion”.     

Inflation and the misallocation of resources

This paper analyzes the effects of inflation on the resource allocation between the financial sector and the manufacturing sector. We develop a model with heterogeneous workers who can be employed either in the manufacturing sector, which produces a consumption good, or the financial sector, which provides liquidity services. A rise in inflation reduces the demand for labor in the manufacturing sector and increases the demand for financial services. This induces a shift of resources from the manufacturing sector to the financial sector and reduces consumption opportunities. An empirical investigation using 55 countries strongly supports the result that higher inflation increases the relative size of the financial sector.     

THE SWINGS OF U.S. INFLATION AND THE GIBSON PARADOX

In recent business cycles, U.S. inflation has experienced a reduction of volatility and a severe weakening in the correlation to the nominal interest rate (Gibson paradox). We examine these facts in an estimated dynamic stochastic general equilibrium model with money. Our findings point at a flatter New Keynesian Phillips Curve (higher price stickiness) and a lower persistence of markup shocks as the main explanatory factors. In addition, a higher interest‐rate elasticity of money demand, an increasing role of demand‐side shocks, and a less systematic behavior of Fed's monetary policy also account for the recent patterns of U.S. inflation dynamics. (JEL E32, E47)     

2012年宏观调控要处理好四大关系

随着经济增长的不确定性和风险进一步增加,2012年,中国继续保持经济持续平稳增长的关键,是在宏观调控上要处理好国际经济与国内经济的关系,“松银根”与“抑通胀”的关系,“抑通胀”、“惠民生”与“控成本”的关系,“稳增长”与“调结构”的关系。要处理好上述四大关系问题,关键是要坚持科学发展观,更加深入地推进转变经济发展方式。其中非常关键的举措,就是要在“稳增长”的前提下,适度调低经济增长率指标,加大结构调整的力度。     

Estimates of Money Demand Functions for Estonia

This paper examines the money demand function of Estonia in the period 1995–2006. Since Estonia has a currency board system, euro area interest rates are taken into account. We apply different cointegration procedures like the Engle–Granger, the dynamic OLS, and the Johansen procedure to estimate the long-run relationship among money, output, and interest rates. The results show that it is difficult to find a cointegrating relationship for the broad money aggregate M2. For the preferred relationship including euro area money market rate and euro area bond rate a dynamic equation is estimated. This dynamic equation is stable for the whole period. The change of the anchor curreny in the currency board and the accession to the European Union do not alter the relationship.      

Exogeneity within the M2 Demand Function: Evidence from a Large Macroeconomic System

A large body of literature investigates whether a stable and predictable long-run association between money and its arguments exists. One point of variation between models is whether to include an interest rate measure directly within the long-run relationship. Several recent studies indicate that empirical findings are sensitive to the choice. Therefore, the present article reexamines the empirical significance of the interest rate within a four-equation macroeconomic system. The results suggest that the interest rate (1) may be excluded from the M2 demand function, (2) is strongly exogenous to most of the system's remaining variables, and (3) may represent a common trend.     

HEALTH CARE INFLATION AND ITS IMPLICATIONS FOR MONETARY POLICY

Motivated by recent findings on the cyclical movement of both health and health spending, we construct a general equilibrium model that distinguishes health care demand from the demand for other goods. Using this model, we are able to generate inflation dynamics and cyclicality of health that match the US data. When the model is subjected to an expansionary monetary policy shock, it yields different output and inflation responses compared with a two‐sector model with homogeneous demand. We show that the trade‐off between leisure and health spending plays an important role in model dynamics. The model further predicts different degrees of inflation stabilization across sectors when a shift in the monetary policy occurs. (JEL E52, E31, E32, I10)     

PRICE PREDICTION ERRORS AND REAL ACTIVITY: A REASSESSMENT

Rational expectations, natural-rate macro-models in which aggregate demand disturbances affect the real sector through price prediction errors, while powerful and tractable analytical tools, are often perceived to be of questionable empirical relevance. This paper reexamines the empirical role of price prediction errors in determining the level of real aggregate activity. The approach is distinguished by accounting for aggregate supply-side disturbances and by more careful treatment of natural rates. Contrary to some previous studies, we find considerable empirical support for the hypothesis that demand-driven price level surprises are positively and significantly correlated with aggregate real economic activity.     

MONEY DEMAND DURING HYPERINFLATION AND STABILIZATION: BOLIVIA, 1980–1988

This paper examines the demand for money in Bolivia during the 1980s, a decade of extreme instability with annual inflation rates reaching over 20,000 percent, and a subsequent stabilization, with annual rates falling to less than 25 percent and remaining so for more than five years.
Our empirical analysis makes use of error-correction approaches, time-varying-parameter estimation with Kalman filtering, and GARCH models of expected inflation and inflation variance. We find that expected inflation and inflation uncertainty both matter for money demand. Time-varying estimates show that the reaction to monetary disequilibria was significantly faster during hyperinflation.