Inflation and Relative Price Variability in the Euro Area: Evidence from a Panel Threshold Model
The impact of inflation on Relative Price Variability (RPV) generates an important channel for real effects of inflation. This article provides first evidence on the empirical relation between inflation and RPV in the euro area. Stirred by the widespread use of inflation caps or target bands in monetary policy practice, we are particularly interested in threshold effects of inflation. In line with the predictions of monetary search models, our results indicate that expected inflation significantly increases RPV only if inflation is either very low (below 0.95% per annum (p.a.)) or very high (above 4.96% p.a.).
Inflation Expectations: Does the Market Beat Professional Forecasts?
IWH Discussion Papers,
The present paper compares expected inflation to (econometric) inflation forecasts
based on a number of forecasting techniques from the literature using a panel of
ten industrialized countries during the period of 1988 to 2007. To capture expected
inflation we develop a recursive filtering algorithm which extracts unexpected inflation from real interest rate data, even in the presence of diverse risks and a potential Mundell-Tobin-effect.
The extracted unexpected inflation is compared to the forecasting errors of ten
econometric forecasts. Beside the standard AR(p) and ARMA(1,1) models, which
are known to perform best on average, we also employ several Phillips curve based approaches, VAR, dynamic factor models and two simple model avering approaches.
Evaluating the German (New Keynesian) Phillips Curve
IWH Discussion Papers,
This paper evaluates the New Keynesian Phillips Curve (NKPC) and its hybrid
variant within a limited information framework for Germany. The main interest rests on the average frequency of price re-optimization of ﬁrms. We use the labor income share as the driving variable and consider a source of real rigidity by allowing for a ﬁxed ﬁrm-speciﬁc capital stock. A GMM estimation strategy is employed as well as an identiﬁcation robust method that is based upon the Anderson-Rubin statistic. We ﬁnd out that the German Phillips Curve is purely forward looking. Moreover, our point estimates are consistent with the view that ﬁrms re-optimize prices every two to three quarters. While these estimates seem plausible from an economic point of view, the uncertainties around these estimates are very large and also consistent with perfect nominal price rigidity where ﬁrms never re-optimize prices. This analysis also oﬀers some explanations why previous results for the German NKPC based on GMM diﬀer considerably. First, standard GMM results are very sensitive to the way how orthogonality conditions are formulated. Additionally, model misspeciﬁcations may be left undetected by conventional J tests. Taken together, this analysis points out
the need for identiﬁcation robust methods to get reliable estimates for the NKPC.
Three methods of forecasting currency crises: Which made the run in signaling the South African currency crisis of June 2006?
IWH Discussion Papers,
In this paper we test the ability of three of the most popular methods to forecast the South African currency crisis of June 2006. In particular we are interested in the out-ofsample performance of these methods. Thus, we choose the latest crisis to conduct an out-of-sample experiment. In sum, the signals approach was not able to forecast the outof- sample crisis of correctly; the probit approach was able to predict the crisis but just with models, that were based on raw data. Employing a Markov-regime-switching approach also allows to predict the out-of-sample crisis. The answer to the question of which method made the run in forecasting the June 2006 currency crisis is: the Markovswitching approach, since it called most of the pre-crisis periods correctly. However, the “victory” is not straightforward. In-sample, the probit models perform remarkably well and it is also able to detect, at least to some extent, out-of-sample currency crises before their occurrence. It can, therefore, not be recommended to focus on one approach only when evaluating the risk for currency crises.
The integration of imperfect financial markets: Implications for business cycle volatility
Journal of Policy Modeling,
During the last two decades, the degree of openness of national financial systems has increased substantially. At the same time, asymmetries in information and other financial market frictions have remained prevalent. We study the implications of the opening up of national financial systems in the presence of financial market frictions for business cycle volatility. In our empirical analysis, we show that countries with more developed financial systems have lower business cycle volatility. Financial openness has no strong impact on business cycle volatility, in contrast. In our theoretical analysis, we study the implications of the opening up of national financial markets and of financial market frictions for business cycle volatility using a dynamic macroeconomic model of an open economy. We find that the implications of opening up national financial markets for business cycle volatility are largely unaffected by the presence of financial market frictions.