SPECULATIVE INTENSITY AND SPOT AND FUTURES PRICE VARIABILITY

This paper develops a simultaneous stochastic rational-expectations model of futures- and spot-price determination. Using the model, we find that increases in what we term speculative intensity increase spot-price variability arising from storage-cost shocks, but decrease spot-price variability arising from demand shocks. In contrast, increases in speculative intensity unambiguously decrease futures-price variability, regardless of the underlying source of disturbances. We are able to develop these comparative-static results because the model has a unique equilibrium.     

STOCK RETURNS, INFLATION, AND REAL OUTPUT

This paper provides empirical evidence on the extent to which the inverse relationship between real stock returns and inflation in recent years is causal or spurious. The results indicate that this relationship is spurious and can be explained by the inverse correlation between unexpected inflation and unexpected real output. The expected and unexpected real output and inflation variables are generated from the ASA/NBER Business Outlook Surveys.     

STOCHASTIC INFLATION AND THE OPTIMAL POLICY OF PRICE ADJUSTMENT

This paper analyzes the optimal policy of price adjustment for a monopolistic firm in the presence of stochastic inflation. It shows that an increase in the expected rate of inflation or in the cost of price adjustment leads to an increase in the initial real price and a decrease in the terminal real price in each period with a fixed nominal price. It also shows that the effects of increased riskiness of inflation are ambiguous.     

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.     

ANTICIPATED INFLATION AND AGGREGATE EMPLOYMENT: THE CASE OF COSTLY PRICE ADJUSTMENT

Even if inflation is perfectly anticipated, a firm that finds nominal price adjustments sufficiently costly will reset its price at multi-period intervals. Consequently, its average output will change in a direction that depends on properties of its profit function. On the basis of this observation, which does not involve money illusion, the paper shows that anticipated inflation can stimulate aggregate employment through a process that entails changes in the factor demands of individual monopolistic firms and in the intersectoral allocation of consumer expenditure. Simulations indicate, however, that the gain in aggregate employment is likely to be modest.     

INFLATION AND THE DISTRIBUTION OF PRICE CHANGES ACROSS MARKETS: A CAUSAL ANALYSIS

Recent advances in time series methodology are applied to the investigation of causal relationships between monthly changes in the consumer price index and changes in its dispersion across different consumption categories. This dispersion is associated with the degree to which relative prices are changing. Past inflation rates seem useful in forecasting changes in relative prices, but not vice-versa; there is also a significant contemporaneous correlation between these series. Hence, it is concluded that fluctuations in the inflation rate help cause fluctuations in relative prices, but not vice-versa unless the entire effect occurs within a month. The analysis also serves to illustrate a new way to implement the Granger causality concept.     

CROSS-COUNTRY EVIDENCE ON LONG-RUN GROWTH AND INFLATION

While inflation is generally inversely related to growth, I show that estimates of the relationship seer two robustness problems which plague a variety of model specifications. First, growth-inflation results are highly sensitive to modifications to the country sample, limited from the start to low- and moderate-inflation countries. Second, results are also sensitive to modifications in the time period of analysis. In conjunction with the regression specification sensitivity documented by Levine and Renelt [1992], these results should further discourage the practice cf quantifying inflation's effects with cross-county growth regressions.     

DETERMINING OUTPUT AND INFLATION VARIABILITY: ARE THE PHILLIPS CURVE AND THE MONETARY POLICY REACTION FUNCTION RESPONSIBLE?

This study analyzes the policy parameters in a Taylor monetary policy reaction function and a Phillips curve equation to determine the variability of inflation and output. The theoretical and empirical investigations yield two key results. First, countries with large parameters in the monetary policy reaction function have low and stable inflation. Second, countries with flatter Phillips curves (i.e., those with a higher degree of price stickiness) have larger output variability. This article also examines the determinants of inflation and output variability as well as determinants of the slope of the Phillips curve.(JEL E32 , E52 )     

ON BALANCED INFLATION

A quais-equilibrium is a set of prices that results in a balanced inflation. This paper sets forth a simpale general equilibrium model with money and proves the existence of a quasi-equibrium.     

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.     

INFLATION AND GOVERNMENT DEFICITS

There is a pronounced positive correlation of inflation and government deficits in the United States since World War II. The purpose of this paper is to test the three leading explanations of this correlation. These three explanations are: (a) a deficit increases prices through a wealth effect; (b) a deficit results in the Federal Reserve purchasing debt, thus increasing the money supply and prices; and (c) expected inflation increases the deficit (which is the change in the nominal value of bonds). No support is found for either of the first two hypotheses. The results indicate that expected government deficits have no significance for future inflation.     

FURTHER EVIDENCE ON THE RELATIONSHIP BETWEEN FEDERAL GOVERNMENT DEBT AND INFLATION

Does an increase in the federal debt cause inflation? Dwyer [1982] using a par value measure of debt, finds no support for such a causal link. Cox [1985] using a market value measure, finds evidence that increases in debt produce higher inflation rates. We reconcile these results by demonstrating that failure to capture the interest rate effects inherent in the market value measure accounts for the finding that debt "causes" inflation. Incorporating interest rates into our test equations using the market value series leads us to conclude that, like the par value series results, increases in federal debt do not cause higher rates of inflation.     

EXPECTED INFLATION AND INTEREST RATES

While there may have been a Darby-Feldstein effect in the 1960's (interest rates rising by more than expected inflation because of tax considerations), the relationship is so variable that it more likely reflects changing investor confidence in the expected returns to capital assets. In addition, the degree of capacity utilization appears to have a strong influence on short-term interest rates, and there is a statistically significant but quantitatively small liquidity effect from changes in the growth rate of money.     

UNCERTAIN EFFECTS OF MONEY AND THE LINK BETWEEN THE INFLATION RATE AND INFLATION UNCERTAINTY

In the postwar period high rates of inflation are associated with high levels of inflation uncertainty. In this paper I argue that the inflation rate and inflation uncertainty are linked by forecasters' uncertainty about the impact of money growth on the price level, and I present evidence indicating that this has been the case. As long as the impact of money growth on the price level remains unpredictable, then even predictable money growth will cause inflation uncertainty with its accompanying adverse effects on employment and output.     

IMPERFECT INFORMATION AND PRICE RIGIDITY

The purpose of this paper is to present a microeconomic model of pricing behavior that is consistent with macroeconomic theory and evidence. The essential ingredient in the model is the hypothesis that imperfect information implies that firms face kinked demand curves. I provide a detailed analysis of this hypothesis and develop its empirical implications. The model provides a microeconomic rationale for the price stickiness assumed in disequilibrium macroeconomic models.