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The paper analyses the role of food price movements in inflation within the Lesotho’s economy. The results reveal that food inflation has generally not only been more volatile and higher than non-food inflation, but also more per...
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The paper analyses the role of food price movements in inflation within the Lesotho’s economy. The results reveal that food inflation has generally not only been more volatile and higher than non-food inflation, but also more persistent than the inflation of non-food products. Furthermore, food price movements are discovered to have significant impact on core inflation, thereby giving evidence that food prices contain some useful information about the underlying inflation trends in Lesotho. On the other hand, the results have shown the presence of strong second-round price effects between food and non-food inflation. These findings, therefore, imply that the setting and communication of monetary policy in Lesotho should be based on developments inunderlying inflation rather than overall inflation. However, any attempt to capture the underlying inflation using measures that exclude food items only on the basis of their high volatility would be unjustified.
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This paper constructs China's core inflation index based on persistence weights for monetary policy and inflation forecast. We apply the univariate autoregression model (AR), whereby the sum of autoregression coefficients is used ...
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This paper constructs China's core inflation index based on persistence weights for monetary policy and inflation forecast. We apply the univariate autoregression model (AR), whereby the sum of autoregression coefficients is used to measure inflation persistence. Due to the possible unit root, we adopt the grid-bootstrap method to obtain the estimates for the inflation persistence. We re-weight the importance of each CPI component, according to its relative persistence. By comparing with traditional core inflation and headline inflation, we find that the persistence-weighted core inflation, is a leading indicator and an attractor of China's headline inflation, with a strong ability to predict the short-term headline inflation, as well as monetary policy decisions.
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Inflation expectations are believed to influence actual inflation and therefore policymaker actions. How ever, methods usually employed to evaluate inflation expectations are insufficient. Survey methods either record economists' ...
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Inflation expectations are believed to influence actual inflation and therefore policymaker actions. How ever, methods usually employed to evaluate inflation expectations are insufficient. Survey methods either record economists' forecasts of the official Consumer Price Index (CPI) (which isn't what policymakers need to know) or consumers' attempts to calculate their own inflation experience. Consumers have little chance to perform the calculations needed to accurately compute inflation. I propose functional forms to substitute for the heuristics consumers actually use to form inflation perceptions. I also propose adjustments to reconcile official price measurements with consumers' perceptions. These adjustments are corrections for cognitive biases related to loss aversion and mental accounting.
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Abstract I introduce the “trimmed persistence PCE,” a new measure of core inflation in which component prices are weighted according to the time-varying persistence of their price changes. The components of trimmed persistence P...
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Abstract I introduce the “trimmed persistence PCE,” a new measure of core inflation in which component prices are weighted according to the time-varying persistence of their price changes. The components of trimmed persistence PCE display less tendency to mechanically pass-through the level of the prior period’s inflation to the current period; thus, the impact of the current stance of monetary policy and real economic factors are more likely to be visible in recent trimmed persistence inflation compared to headline inflation. Trimmed persistence inflation performs comparably to existing popular measures of core inflation in terms of volatility and relationship with economic slack. Model selection procedures confirm trimmed persistence PCE contributes additional information to inflation forecasting models when stacked against other popular measures of core inflation. Applying the new index in a Taylor rule analysis suggests the Fed’s aggressive path of federal funds rate hikes during the pandemic may have achieved appropriately restrictive levels by the fourth quarter of 2022, clearing the way for more measured policy adjustment thereafter as risks of policy overshooting became more salient.
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The accuracy of inflation forecasts obtained from household and professional surveys has deteriorated noticeably of late, to the extent that a simple autoregressive specification outperforms survey forecasts. The decline in (absol...
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The accuracy of inflation forecasts obtained from household and professional surveys has deteriorated noticeably of late, to the extent that a simple autoregressive specification outperforms survey forecasts. The decline in (absolute and relative) accuracy has taken place at about the same time as an apparent change in the inflation process. Projections of household forecasts on realized inflation suggests that households have not recognized this change. For the professionals, projections of expected inflation on headline inflation have changed, but on core inflation have not. By contrast, projections of realized headline inflation on core have changed sharply.
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This paper proposes the use of wavelet methods to estimate U.S. core inflation. It explains wavelet methods and suggests that they are ideally suited to this task. Comparisons are made with traditional Consumer Price Index-based a...
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This paper proposes the use of wavelet methods to estimate U.S. core inflation. It explains wavelet methods and suggests that they are ideally suited to this task. Comparisons are made with traditional Consumer Price Index-based and regression-based measures for their performance in following trend inflation and predicting future inflation. Results suggest that wavelet-based measures perform better, and sometimes much better, than the traditional approaches. These results suggest that wavelet methods are a promising avenue for future research on core inflation.
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The rate of swap contracts linked to inflation can be a poor measure of inflation expectations, as it incorporates time-varying risk premia. By following an established approach, we estimate inflation risk premia and construct ris...
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The rate of swap contracts linked to inflation can be a poor measure of inflation expectations, as it incorporates time-varying risk premia. By following an established approach, we estimate inflation risk premia and construct risk-adjusted measures of inflation expectations for the US and the euro area. Our results show that premia are negatively related to the business cycle and the volatility of the stock market, increase with the maturity of the contract and are on average lower in the US than in the euro area. (C) 2018 Elsevier B.V. All rights reserved.
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Investors have always been interested in reducing inflation risk in their portfolios. However, investors face different types of inflation than those measured by the Consumer Price Index (CPI). Moreover, different asset classes ca...
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Investors have always been interested in reducing inflation risk in their portfolios. However, investors face different types of inflation than those measured by the Consumer Price Index (CPI). Moreover, different asset classes can be used to hedge portfolio inflation. In this paper, we show how individual equities can be used to construct equity portfolios sensitive to customized inflation targets. We illustrate portfolios for three types of inflation: US headline CPI, Forbes Cost of Living Extremely Well Index, and the US Medical Care Price Index. We also show how alternative weighting schemes, such as minimum volatility and maximum inflation beta, can be used to construct inflation-hedged portfolios.
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Forecasts of agents who are actively involved in the setting of prices and wages are less readily available than those of professional analysts but may be more relevant for understanding inflation dynamics. Here we compare inflati...
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Forecasts of agents who are actively involved in the setting of prices and wages are less readily available than those of professional analysts but may be more relevant for understanding inflation dynamics. Here we compare inflation expectations anchoring between analysts, businesses and trade unions for one country for which comparable forecasts are available for almost two decades: South Africa. Forecasts are modelled as monotonically diverging from an estimated long-run anchor point, or 'implicit anchor', towards actual inflation as the forecast horizon shortens. We find that the estimated inflation anchors of analysts lie within the 3-6 percent inflation target range of the central bank. However, those for businesses and trade unions, which our evidence suggests may be the most relevant for driving the inflation process, have remained above the top end of the official target range. Our results point to challenges for central banks seeking to gain credibility with agents whose decisions directly influence inflation.
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In the second half of 2012, euro area inflation started declining and reached historical lows at the end of 2014. Market-based measures of inflation expectations also declined to unprecedented levels. During this disinflationary p...
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In the second half of 2012, euro area inflation started declining and reached historical lows at the end of 2014. Market-based measures of inflation expectations also declined to unprecedented levels. During this disinflationary period, inflation releases have often surprised analysts on the downside. We provide evidence that inflation surprises' have significant effects on inflation expectations. The sensitivity of inflation expectations to the surprises, which has varied over time, disappeared after the introduction of the Asset Purchase Programme by the European Central Bank.
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