View
26
Download
0
Category
Tags:
Preview:
Citation preview
Lecture 11
Inflation and monetary policy
Hubert Kempf
Economic policies
Master in economics
Inflation and monetary policy
1 – Inflation dynamics – recent trends and monetary policy strategy issues
2 – Inflation and monetary policy strategies: an overview
1 – Inflation dynamics
1.1 – Global trends
1.2 – Price developments in the euro area 1.3 – Monetary policy / strategy implications
1.1 – Recent trends: global disinflation
Global inflation (% y-o-y)
0
5
10
15
20
25
30
35
40
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Advanced economies World (All WEO countries)
Tentative explanations
1 – Good Luck?
• absence of adverse supply shocks in the 1990s
• positive supply shock: new economy
• Positive supply change: globalisation
2 – Good Practices?
• inventories
• price and wage setting in a context of well anchored inflation expectations
• increased competition
3 – Good Policies?
• stability-oriented macroeconomic policies
1.2 – Price developments in the euro area
-2
0
2
4
6
8
10
12
14
16
Source: ECB - M. Ehrmann and F. Smets (2005).
Note: The chart shows quarter-on-quarter (red) and year-on-year (blue) inflation, and its average value over three sub-periods that have been identified by breakpoint tests.
HICP and core inflation
Figure 1: inflation and underlying inflation in the euro area(1999M1-2005M9)
0
0,5
1
1,5
2
2,5
3
3,5
perc
enta
ges
Inflation
Underlyinginflation
Inflation persistence in the Euro Area – Macro evidence
tutt uaLa 10 )(
....)( 2321 LLL
%9,1)1(1
* 0
a
40.0
* : Inflation de LT
Dependent Variable: π
Method: Least Squares
Date: 02/10/05 Time: 10:38
Sample (adjusted): 1995M01 2004M12
Included observations: 120 after adjustments
Variable Coefficient Std. Error t-Statistic Prob.
π(-12) 0.659205 0.090646 7.272268 0.0000
π(-24) -0.251187 0.073918 -3.398205 0.0009
C 1.176806 0.152120 7.736041 0.0000
R-squared 0.323390 Mean dependent var 1.977511
Adjusted R-squared 0.311824 S.D. dependent var 0.527215
S.E. of regression 0.437358 Akaike info criterion 1.208554
Sum squared resid 22.38002 Schwarz criterion 1.278241
Log likelihood -69.51323 F-statistic 27.96047
Durbin-Watson stat 0.343231 Prob(F-statistic) 0.000000
Price stickiness: micro data evidence
Eurosystem Inflation Persistence Network
- Analysis of CPI micro data
- Analysis of producer prices
- Survey evidence (à la Blinder, 1998)
Based on “Price Setting in the euro area: Some stylised facts from Individual Consumer Price Data” by Dhyne, Álvarez, Le Bihan, Veronese, Dias, Hoffmann, Jonker, Lünnemann, Rumler and Vilmunen (2005)
Raw data: (millions of) individual price records
from data underlying the CPI
Common sample: 50 product categories
representative of CPI
10 euro area countries : AT, BE, DE, ES, FR, FI,
IT, LU, NE, PT
Countries not covered : GR, IR (3% of area GDP)
Period covered : January 1996 - December 2001
Fact 1: prices change infrequently (on average once every year)
Average frequency of price changes for the euro area : 15.1 % per month. Average duration of a price spell (based on indirect estimators): 4 to 5 quarters. Compared to the US: price adjustment in the euro area less frequent(respective US figures are around 25% and 2 quarters)
Stylized Facts
0
5
10
15
20
25
30
0 5 10 15 20 25 30
euro area
Uni
ted
Sta
tes
(months)
(mon
ths)
Product level price duration - Euro area vs US(product averages)
Fact 2: When they occur, price changes tend to be quite large
Absolute magnitude around 8-10% in the retail sector and about 5% in the producer sector The magnitude of price reductions (10%) is roughly similar to that of price increases (8%).
Therefore, price of goods not changed around average or past inflation
Fact 3: No strong evidence of downward price rigidity in the euro area.
Price decreases are not uncommon, except in services
In services, small price increases are common and decreases very rare.
On average, 40% of price changes are price reductions.
0
0.15
0.3
0.45
0.6
0 0.15 0.3 0.45 0.6
Frequency of price increases
Fre
qu
en
cy
of
pri
ce
de
cre
as
es
0
0.125
0.25
0.375
0.5
0 0.125 0.25 0.375 0.5
Size of price increases
Siz
e of
pri
ce d
ecre
ases
Sectoral ranking. Price changes are :
- very frequent for energy (oil products-F=78%) and unprocessed food (28%), - relatively infrequent for non-en. industrial goods (9%)
- more so for services (6%).
Fact 4: Cross-product heterogeneity is substantial
Frequency of price increases and price decreasesEuro area figures in p.c. (using HICP weights)
0.580.800.570.540.540.54Share of price increases
0.060.010.030.360.060.13Frequency of price decreases
0.080.040.040.420.070.15Frequency of price increases
0.150.060.090.780.140.28Frequency of price changes
TotalServicesNon-energy industrial
goods
EnergyProcessed food
Unprocessed food
Distribution of the frequency of price changes
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
0.16
0.18
0.20
[0; 0
.02)
[0.1
; 0.1
2)
[0.2
; 0.2
2)
[0.3
; 0.3
2)
[0.4
; 0.4
2)
[0.5
; 0.5
2)
[0.6
; 0.6
2)
[0.7
; 0.7
2)
[0.8
; 0.8
2)
[0.9
; 0.9
2)
Frequency of price changes (in p.c.)
Den
sity
(in
p.c.
)
Fact 5: Cross-country heterogeneity is relevant but not as marked
Frequency ranges from 10% (Italy) to 23%
(Luxembourg)
Partly related to :
- the consumption structure
- the statistical treatment of sales.
Fact 6: Weak synchronisation of price changes across price-setters at the product level
Synchronization Ratio
min median max
at 0.12 0.21 0.85be 0.09 0.18 0.86de 0.06 0.13 0.44es 0.06 0.15 0.45fi 0.16 0.36 1.00fr 0.09 0.19 0.78it 0.08 0.24 0.60lu 0.19 0.48 1.00nl 0.09 0.27 1.00pt 0.11 0.17 0.90euro 0.08 0.18 0.62
Note: Fisher and Konieczny. (2000) index
FK=0 for perfect staggering and
FK=1 for perfect synchronisation
Other statistical evidence
From country studies:● Time-dependence:
• Seasonal patterns : changes more frequent in January and September
• Durations of 12, 24 and 36 months
● State-dependence. Probability of price changes responds to
• Indirect tax rate changes, euro cash changeover• level of aggregate inflation, sectoral or product level
inflation• variability of sectoral or product level inflation
Frequency of price change over time - French CPI data
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
total (incl. replacements) increases decreases
Euro cash changeoverVAT decreaseVAT increase
Source: Baudry, Le Bihan, Sevestre, Tarrieu (2004)
1.3 - Monetary policy implications
To recap :
1) Euro area has been hit by a series of cost-push shocks over the past six years
2) The degree of inflation persistence limited in the
euro area and similar to that of the US…
3) But the degree of price stickiness is
considerable and higher than in the States
Policy implications (1)
1) A smaller degree of inflation persistence implies a smaller response of policy rate to cost-push shocks
2) A higher degree of price stickiness implies a
greater effectiveness of monetary policy and a less
activist monetary policy
3) But it also implies a slower response to other
shocks (as productivity shocks) which calls for
more a aggressive monetary policy response
Policy implications (2)
Caveats :
1) Uncertainty about the degree of inflation
persistence and price stickiness
2) When inflation expectations are a key
determinant of the degree of inflation persistence
3) Heterogeneity in price stickiness (service sector)
Policy implications (3)
Downward price rigidity: it is often argued that downward price rigidity implies a higher inflation objective to facilitate relative price adjustments;
the absence of downward price rigidity may call for a more ambitious inflation objective
2 – Inflation and monetary policy strategies
2.1 – An overview of current strategies
2.2 – Pro and cons 2.3 – A focus on Inflation targeting
2.1- An overview of Monetary policy strategies
Rule-based Discretion
CurrencyBoard
ExchangeRate peg
Crawling peg
Inflationtargeting
Multiplemandate
1 - Monetary policy framework
2 - communication
Simple Complex
Monetarytargeting
Exchange Rate Regime
Monetary Inflation IMF-aggregate targeting supported
target framework mon. Prog.
Another
Euro area
(12)3
currency
Austria
as legal Belgium
tender (9) Finland
FranceGermany
Greece
Ireland
Italy
LuxembourgNetherlands
WAEMU CAEMC PortugalEcuador Antigua and Benin Cameroon* Spain
El Salvador4 Barbuda Burkina Faso* Central
Kiribati Dominica* Côte d'Ivoire* African
Marshall Islands
Grenada Guinea-Bissau Rep.
Micronesia, St. Kitts and Mali* Chad
Fed. Nevis Niger Congo,
States of St. Lucia Senegal* Rep. of
Palau St. Vincent Togo Equatorial
Panama and the Guinea
San Marino Grenadines Gabon*
Timor-Leste
Brunei Darussalam
BulgariaChina-Hong Kong SAR
Djibouti
Estonia9
Lithuania9
Currency board arrangements (7)
Bosnia and Herzegovina
CFA franc zone (14)
Monetary Policy Framework
Exchange rate anchor OtherExchange arrangements with no separate legal tender (41)
ECCU (6)2
Exchange Rate Regime
Monetary Inflation IMF-aggregate targeting supported
target framework mon. Prog.China,
P.R. of†6
Monetary Policy Framework
Exchange rate anchor Other
Bolivariana de
Zimbabwe6
United Arab EmiratesVenezuela, Rep.
Turkmenistan6
Ukraine*6
Swaziland
Syrian Arab Rep.5
Seychelles6
Suriname5,6
QatarSaudi Arabia
Netherlands Antilles
Oman
Namibia
Nepal*
Malaysia
Maldives
Lesotho*
Macedonia, FYR*6
Kuwait
Lebanon6
Iraq 6
Jordan*6
Eritrea
Guinea6
Morocco
China, P.R. of†6 Samoa
Comoros7 Vanuatu
composite (8)
Aruba Botswana5
Bahamas, The5 Fiji
Bahrain, Kingdom of LatviaBarbados
Other conventional fixed peg arrangements (42)
Against a single currency (34)
Against a
Libyan Arab
Belize Jamahiriya
Bhutan Malta
Cape Verde*
Exchange Rate Regime
Monetary Inflation IMF-aggregate targeting supported
target framework mon. Prog.
Crawlingpegs (6)
Bangladesh* Czech Rep. Argentina* Afghanistan,
Cambodia5 Peru*6 Azerbaijan* I.S. of
Egypt5 Thailand Croatia Algeria3
Ghana*6 Ethiopia* Angola 3
Guyana* Georgia* Burundi*3
Indonesia Haiti3,6 Gambia,
The* 3,6
Iran, I.R. of Kenya* India3
Jamaica6 Kyrgyz Rep.* Kazakhstan3
Mauritius Lao PDR*5 Mauritania*
Moldova Mongolia* Myanmar3,5,6
Sudan Mozambique6 Nigeria6
Zambia* Pakistan* Paraguay*3
Rwanda* Russian
Federation3
Serbia and São Tomé
Montenegro*11 and Príncipe
Tajikistan* Singapore3
Vietnam Slovak Rep.3
Trinidad and
Tobago
Uzbekistan3,5
Monetary Policy Framework
Exchange rate anchor Other
Romania6 Managed floating with no pre-determined path for the exchange rate (48)
Exchange rates within
Belarus
Costa Rica
Honduras*6
Nicaragua*
Solomon Islands6
Tunisia
Bolivia* Tunisia Honduras*6
Hungary†
Denmark9 Cyprus
Slovenia9 Hungary†
Tonga
Pegged exchange rates within horizontal
bands (5) 8
Within a cooperative arrangement (2)
Other band arrangements (3)
Exchange Rate Regime
Monetary Inflation IMF-aggregate targeting supported
target framework mon. Prog.Malawi* Australia Albania* Dominican
Sierra Leone*6 Brazil* Armenia* Rep.*3
Sri Lanka* Canada Congo, Dem. Japan 3
Uruguay* Chile5 Rep. of* Liberia3,6
Yemen, Colombia* Madagascar* Papua New Rep. of Guatemala Tanzania* Guinea3
Iceland
Israel†6
Uganda* Somalia5,12
Korea Switzerland3
Mexico United States3
New ZealandNorwayPhilippinesPolandSouth Africa
Sweden
Turkey*
United Kingdom
Independently floating (36)
Monetary Policy Framework
Exchange rate anchor Other
2.2- Pro and cons of alternative policy regimes
1 - Exchange-rate pegging: from currency board to crawling peg:
Pros…
• provides an nominal anchor
• prevents time-inconsistency
• corrects low credibility
• monetary policy bound by a rule
• simple and clear to communicate
• can lower inflation quickly
…and cons:
• loss of an independent monetary policy (idiosyncratic shocks)
• little scope for discretion
• transmission of shocks from the anchor country
• leaves the country open to speculative attacks
• eliminates lender-of-last-resort function
Objective: peg the currency to that of a large, low inflation country
2 – Monetary targeting
Pros…
• independent monetary policy
• nominal anchor
• high frequency publication of monetary aggregates
• monetary policy bound by a rule
• fairly easy to communicate
…and cons:
2 big ifs:
• relies on the existence of a strong relationship between the goal variable and the targeted aggrate
• the targeted aggregate must be well-controlled by the central bank
Objective: money growth as an nominal anchor
3 – Inflation targeting
Pros…
• transparent monetary policy
• clear commitment to price stability
• accountability
• helps focus the public attention to price stability
…and cons:
• inflation not easily controlled
by central banks
• inflation outcomes revealed with substantial lags
• sole focus on inflation that may lead to larger output fluctuations
Objective: public announcement of a medium-term numerical target for inflation with an institutional commitment by the CB to achieve this target
4 – Multiple mandate
Pros…
• track records: it worked well
• discretion
…and cons:
• Lack transparency
• may create economic and financial uncertainty
• time-inconsistency
• absence of nominal anchor make higher inflation likely
• strong dependence on individuals: The Magic Greenspan
Objective: pre-emptive monetary policy without an explicit nominal anchor
Conclusion
Fighting inflation: more than manipulating money supply!
Why monetary regimes and rules are important?
Because of the role played by expectations!
The dynamics of pricing behaviour and therefore of inflation
Necessary to play on expectations!
Recommended