Switching to Good Policy? The Case of Central and Eastern European Inflation Targeters
Andrej Drygalla
Macroeconomic Dynamics,
im Erscheinen
Abstract
The paper analyzes how actual monetary policy changed following the official adoption of inflation targeting in the Czech Republic, Hungary, and Poland and how it affected the volatilities of important macroeconomic variables in the years thereafter. To disentangle the effects of the policy shift from exogenous changes in the volatilities of these variables, a Markov-switching dynamic stochastic general equilibrium model is estimated that allows for regime switches in the policy parameters and the volatilities of shocks hitting the economies. Whereas estimation results reveal periods of high and low volatility for all three economies, the presence of different policy regimes is supported by the underlying data for the Czech Republic and Poland, only. In both economies, monetary policy switched from weak and unsystematic to strong and systematic responses to inflation dynamics. Simulation results suggest that the policy shifts of both central banks successfully reduced inflation volatility in the following years. The observed reduction in output volatility, on the other hand, is attributed more to a reduction in the size of external shocks.
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Trade Effects of Silver Price Fluctuations in 19th-Century China: A Macro Approach
Makram El-Shagi, Lin Zhang
China Economic Journal,
2020
Abstract
We assess the role of silver price fluctuations in Chinese trade and GDP during the late Qing dynasty, when China still had a bimetallic (silver/copper) monetary system, in which silver was mostly used for international trade. Using a structural VAR (SVAR) with blockwise recursive identification, we identify the impact of silver price shocks on the Chinese economy from 1867, when trade data became available, to 1910, one year before the Qing dynasty collapsed. We find that silver price shocks had a sizable impact on both imports and exports but only a very minor effect on the trade balance, only a marginal impact on growth, and almost no effect on domestic prices. Stronger effects were partly mitigated by inelastic export quantities. Generally, the effect of silver price shocks, while considerable, was only short-lived, displaying no persistence in either direction. We find that the bimetallic system in Qing China might have mitigated a potential positive effect of silver depreciation but did not reverse the effect, which – contrary to claims made in the previous literature – was responsible for neither the worsening trade balance nor the inflation and the quickly increasing imports that occurred during our sample period.
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The Evolution of Monetary Policy in Latin American Economies: Responsiveness to Inflation under Different Degrees of Credibility
Stefan Gießler
IWH-Diskussionspapiere,
Nr. 9,
2020
Abstract
This paper investigates the forward-lookingness of monetary policy related to stabilising inflation over time under different degrees of central bank credibility in the four largest Latin American economies, which experienced a different transition path to the full-fledged inflation targeting regime. The analysis is based on an interest rate-based hybrid monetary policy rule with time-varying coefficients, which captures possible shifts from a backward-looking to a forward-looking monetary policy rule related to inflation stabilisation. The main results show that monetary policy is fully forward-looking and exclusively reacts to expected inflation under nearly perfect central bank credibility. Under a partially credible central bank, monetary policy is both backward-looking and forward-looking in terms of stabilising inflation. Moreover, monetary authorities put increasingly more priority on stabilising expected inflation relative to actual inflation if central bank credibility tends to improve over time.
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What Drives the Commodity-Sovereign-Risk-Dependence in Emerging Market Economies?
Hannes Böhm, Stefan Eichler, Stefan Gießler
IWH-Diskussionspapiere,
Nr. 23,
2019
Abstract
Using daily data for 34 emerging markets in the period 1994-2016, we find robust evidence that higher export commodity prices are associated with higher sovereign bond returns (indicating lower sovereign risk). The economic effect is especially pronounced for heavy commodity exporters. Examining the drivers, we find, first, that commodity-dependence is higher for countries that export large volumes of volatile commodities and that the effect increases in times of recessions, high inflation, and expansionary U.S. monetary policy. Second, the importance of raw material prices for sovereign financing can likely be mitigated if a country improves institutions and tax systems, attracts FDI inflows, invests in manufacturing, machinery and infrastructure, builds up reserve assets and opens capital and trade accounts. Third, the concentration of commodities within a country’s portfolio, its government indebtedness or amount of received development assistance appear to be only of secondary importance for commodity-dependence.
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Resolving the Missing Deflation and Inflation Puzzles
Jesper Lindé, Mathias Trabandt
VOX, CEPR Policy Portal,
2019
Abstract
The alleged breakdown of the Phillips curve has left monetary policy researchers and central bankers wondering if we need to develop completely new models for price and wage determination. This column argues that a relatively small alteration of the standard New Keynesian model, combined with using the nonlinear instead of the linearised solution, is sufficient to resolve the two puzzles – the ‘missing deflation’ during the recession and the ‘missing inflation’ during the recovery – underlying the supposed breakdown.
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Resolving the Missing Deflation Puzzle
Jesper Lindé, Mathias Trabandt
CEPR Discussion Papers 13690,
2019
Abstract
We propose a resolution of the missing deflation puzzle. Our resolution stresses the importance of nonlinearities in price- and wage-setting when the economy is exposed to large shocks. We show that a nonlinear macroeconomic model with real rigidities resolves the missing deflation puzzle, while a linearized version of the same underlying nonlinear model fails to do so. In addition, our nonlinear model reproduces the skewness of inflation and other macroeconomic variables observed in post-war U.S. data. All told, our results caution against the common practice of using linearized models to study inflation and output dynamics.
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Inference in Structural Vector Autoregressions when the Identifying Assumptions are not Fully Believed: Re-evaluating the Role of Monetary Policy in Economic Fluctuations
Christiane Baumeister, James D. Hamilton
Journal of Monetary Economics,
2018
Abstract
Point estimates and error bands for SVARs that are set identified are only justified if the researcher is persuaded that some parameter values are a priori more plausible than others. When such prior information exists, traditional approaches can be generalized to allow for doubts about the identifying assumptions. We use information about both structural coefficients and impacts of shocks and propose a new asymmetric t-distribution for incorporating information about signs in a nondogmatic way. We apply these methods to a three-variable macroeconomic model and conclude that monetary policy shocks are not the major driver of output, inflation, or interest rates.
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Aufschwung verliert an Fahrt – Weltwirtschaftliches Klima wird rauer: Gemeinschaftsdiagnose Herbst 2018
Externe Monographien,
Nr. 2,
2018
Abstract
Der Aufschwung in Deutschland geht in sein sechstes Jahr. Er hat allerdings an Fahrt eingebüßt. Dies hat sowohl nachfrageseitige als auch angebotsseitige Gründe. Zum einen hat sich das Auslandsgeschäft im Einklang mit der Verlangsamung der Konjunktur in den wichtigsten deutschen Absatzmärkten abgeschwächt. Zum anderen sehen sich Unternehmen allem Anschein nach zunehmend produktionsseitigen Engpässen gegenüber, vor allem bei Arbeitskräften und beim Bezug von Vorleistungsgütern. Überlagert wird dies durch Probleme in der Automobilindustrie im Zusammenhang mit der Einführung des neuen Prüfverfahrens WLTP, die aufgrund der hohen gesamtwirtschaftlichen Bedeutung der Branche sichtbare Spuren beim Zuwachs des Bruttoinlandsprodukts hinterlassen. Die Umstellungsprobleme dürften aber im Winterhalbjahr überwunden werden. Hinzu kommen Impulse aufgrund von finanzpolitischen Maßnahmen, die zum Jahresbeginn 2019 in Kraft treten. Im Durchschnitt dürfte die Wirtschaftsleistung nach einem Zuwachs um 1,7 Prozent in diesem Jahr mit Raten von 1,9 Prozent im Jahr 2019 und 1,8 Prozent im Jahr 2020 expandieren. Die Beschäftigung dürfte weiter spürbar, wenngleich mit abnehmendem Tempo ausgeweitet werden. Die registrierte Arbeitslosigkeit nähert sich gegen Ende des Prognosezeitraums wohl der Marke von 2 Millionen. Die Inflation wird sich dabei voraussichtlich von 1,8 Prozent im Durchschnitt dieses Jahres auf 2,0 Prozent im kommenden Jahr beschleunigen und 2020 bei 1,9 Prozent liegen. Trotz einer expansiv ausgerichteten Finanz-politik zeichnen sich für den Staat weiterhin Haushaltsüberschüsse ab, die allerdings von 54 Milliarden Euro auf 41 Milliarden Euro zurückgehen werden.
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