Indexed versus nominal government debt under inflation and price-level targeting

This paper presents a DSGE model in which long run inflation risk matters for social welfare. Optimal indexation of long-term government debt is studied under two monetary policy regimes: inflation targeting (IT) and price-level targeting (PT). Under IT, full indexation is optimal because long run inflation risk is substantial due to base-level drift, making indexed bonds a much better store of value than nominal bonds. Under PT, where long run inflation risk is largely eliminated, optimal indexation is substantially lower because nominal bonds become a better store of value relative to indexed bonds. These results are robust to the PT target horizon, imperfect credibility of PT and model calibration, but the assumption that indexation is lagged is crucial. From a policy perspective, a key finding is that accounting for optimal indexation has important welfare implications for comparisons of IT and PT.

The Inflation Risk Premium on Government Debt in an Overlapping Generations Model

This paper presents a general equilibrium model in which nominal government debt pays an inflation risk premium. The model predicts that the inflation risk premium will be higher in economies which are exposed to unanticipated inflation through nominal asset holdings. In particular, the inflation risk premium is higher when government debt is primarily nominal, steady-state inflation is low, and when cash and nominal debt account for a large fraction of consumers' retirement portfolios. These channels do not appear to have been highlighted in previous models or tested empirically. Numerical results suggest that the inflation risk premium is comparable in magnitude to standard representative agent models. These findings have implications for management of government debt, since the inflation risk premium makes it more costly for governments to borrow using nominal rather than indexed debt. Simulations of an extended model with Epstein-Zin preferences suggest that increasing the share of indexed debt would enable governments to permanently lower taxes by an amount that is quantitatively non-trivial.

Arch and Structural Breaks in United States Inflation

United States Phillips curves are routinely estimated without accounting for the shifts in mean inflation. As a result we may expect the standard estimates of Phillips curves to be biased and suffer from ARCH. We demonstrate this is indeed the case. We also demonstrate that once the shifts in mean inflation are accounted for the ARCH is largely eliminated in the estimated model and the model defining expected rate of inflation in the New Keynesian model plays no significant role in the dynamics of inflation.

The Inflation Bias under Calvo and Rotemberg Pricing.

New Keynesian models rely heavily on two workhorse models of nominal inertia - price contracts of random duration (Calvo, 1983) and price adjustment costs (Rotemberg, 1982) - to generate a meaningful role for monetary policy. These alternative descriptions of price stickiness are often used interchangeably since, to a first order of approximation they imply an isomorphic Phillips curve and, if the steady-state is efficient, identical objectives for the policy maker and as a result in an LQ framework, the same policy conclusions. In this paper we compute time-consistent optimal monetary policy in bench-mark New Keynesian models containing each form of price stickiness. Using global solution techniques we find that the inflation bias problem under Calvo contracts is significantly greater than under Rotemberg pricing, despite the fact that the former typically significant exhibits far greater welfare costs of inflation. The rates of inflation observed under this policy are non-trivial and suggest that the model can comfortably generate the rates of inflation at which the problematic issues highlighted in the trend inflation literature emerge, as well as the movements in trend inflation emphasized in empirical studies of the evolution of inflation. Finally, we consider the response to cost push shocks across both models and find these can also be significantly different. The choice of which form of nominal inertia to adopt is not innocuous.

The Monetary policy rules and the inflation process in open emerging

This paper has three objectives. First, it aims at revealing the logic of interest rate setting pursued by monetary authorities of 12 new EU members. Using estimation of an augmented Taylor rule, we find that this setting was not always consistent with the official monetary policy. Second, we seek to shed light on the inflation process of these countries. To this end, we carry out an estimation of an open economy Philips curve (PC). Our main finding is that inflation rates were not only driven by backward persistency but also held a forward-looking component. Finally, we assess the viability of existing monetary arrangements for price stability. The analysis of the conditional inflation variance obtained from GARCH estimation of PC is used for this purpose. We conclude that inflation targeting is preferable to an exchange rate peg because it allowed decreasing the inflation rate and anchored its volatility.

From Bretton Woods to inflation targeting: financial change and monetary policy evolution in Europe

Different ‘monetary architectures’ are distinguished, as a background to a discussion of the change in developed country monetary policy frameworks from fixed exchange rates under the Bretton Woods international monetary system to, ultimately, formal or informal inflation targeting. The introduction and experience of monetary targets in the 1970s is considered, followed by an analysis of the changes in countries’ monetary architectures, with particular reference to money and bond markets and to France and Italy, in the 1980s. Exchange rate targeting in Europe in the 1980s and 1990s is examined, followed by the changes in central bank independence in the 1990s. This leads to a discussion of the introduction of inflation targeting, and the issues raised for inflation targeting by the financial crisis of the late 2000s.

Quantile forecasts of inflation under model uncertainty

Bayesian model averaging (BMA) methods are regularly used to deal with model uncertainty in regression models. This paper shows how to introduce Bayesian model averaging methods in quantile regressions, and allow for different predictors to affect different quantiles of the dependent variable. I show that quantile regression BMA methods can help reduce uncertainty regarding outcomes of future inflation by providing superior predictive densities compared to mean regression models with and without BMA.

'Modern' Phillips Curves and the Implications For The Statistical Process of Inflation

'Modern' theories of the Phillips curve imply that inflation is an integrated, or near integrated process. This paper explains this implication and why these 'modern' theories are logically inconsistent with what is commonly known about the statistical process of inflation.

Inflation dynamics and the New Keynesian Phillips curve in EU-4

The paper seeks to shed light on inflation dynamics of four new EU member states: the Czech Republic, Hungary, Poland and Slovakia. To this end, the New Keynesian Phillips curve augmented for open economies is estimated and additional statistical tests applied. We find the following. (1) The claim of New Keynesians that the real marginal cost is the main inflation-forcing variable is fragile. (2) Inflation seems to be driven by external factors. (3) Although inflation holds a forward-looking component, the backward-looking component is substantial. An intuitive explanation for higher inflation persistence may be rather adaptive than rational price setting of local firms.

How does monetary policy change? evidence on inflation targeting countries

We examine the evolution of monetary policy rules in a group of inflation targeting countries (Australia, Canada, New Zealand, Sweden and the United Kingdom) applying moment- based estimator at time-varying parameter model with endogenous regressors. Using this novel flexible framework, our main findings are threefold. First, monetary policy rules change gradually pointing to the importance of applying time-varying estimation framework. Second, the interest rate smoothing parameter is much lower that what previous time-invariant estimates of policy rules typically report. External factors matter for all countries, albeit the importance of exchange rate diminishes after the adoption of inflation targeting. Third, the response of interest rates on inflation is particularly strong during the periods, when central bankers want to break the record of high inflation such as in the U.K. or in Australia at the beginning of 1980s. Contrary to common wisdom, the response becomes less aggressive after the adoption of inflation targeting suggesting the positive effect of this regime on anchoring inflation expectations. This result is supported by our finding that inflation persistence as well as policy neutral rate typically decreased after the adoption of inflation targeting.

Reactive rise in blood pressure upon cuff inflation : cuff inflation at the arm causes a greater rise in pressure than at the wrist in hypertensive patients

Résumé en français: Il est admis que l'inflation d'une manchette à pression au niveau du bras engendre une augmentation réactionnelle de la tension artérielle qui peut être le résultat d'une gêne lors de l'inflation et peut diminuer la précision de la mesure. Dans cette étude, nous comparons séquentiellement l'augmentation de la tension artérielle lorsque la manchette à pression est positionnée au niveau du bras et au niveau du poignet. Nous avons étudié un collectif de 34 participants normotendus et 34 patients hypertendus. Chacun d'eux était équipé de deux manchettes à pression, l'une au niveau du bras et l'autre au niveau du poignet. Nous avons randomisé l'ordre d'inflation des manchettes ainsi que la pression d'inflation maximale (180mmHg versus 240mmHg). Trois mesures étaient effectuées pour chaque pression d'inflation maximale, ceci au bras comme poignet, et leur séquence était également randomisée. En parallèle, un enregistrement continu de la tension artérielle avait lieu au niveau du majeur de la main opposée à l'aide d'un photoplethysmographe. Cette valeur était considérée comme la valeur de tension artérielle au repos. Pour les participants normotendus, aucune différence statistiquement significative n'a pu être mise en évidence en lien avec la position de la manchette à pression, ceci indépendamment de la pression d'inflation maximale. Variation de la pression systolique à 180 mmHg: 4.3+/-3.0 mmHg au bras et 3.7+/-2.9 mmHg au poignet (p=ns), à 240 mmHg: 5.5+/-3.9 au bras et 4.2+/-2.7 mmHg au poignet (p=0.052). En revanche, concernant les patients hypertendus, une augmentation significative de la tension artérielle a été mise en évidence entre le bras et le poignet. Ceci pour les valeurs de tension artérielle systolique et diastolique et quelle que soit la pression d'inflation maximale utilisée. Augmentation de la pression artérielle systolique 6.513.5 mmHg au bras et 3.812.1mmHg au poignet pour une pression d'inflation maximale de 180 mmHg (p<0.01) et respectivement 6.413.5 mmHg et 4.713.0 mmHg pour 240 mmHg (p=0.01). L'augmentation des valeurs de tension artérielle était indépendante de la valeur tensionnelle de base. Ces résultats montrent que les patients hypertendus réagissent significativement moins à l'inflation d'une manchette ä pression lorsque celle-ci est positionnée au niveau du poignet par rapport au bras, ceci indépendamment des valeurs de tension artérielle de base des patients. Nous pouvons donc suggérer que l'inflation d'une manchette à pression cause moins de désagrément lorsqu'elle est placée au niveau du poignet, notamment chez les patients hypertendus et qu'elle peut être une alternative à la mesure standard au niveau du bras.

Mécanismes moléculaires de la fonction anti-apoptotique des HDLs sur la cellule béta pancréatique : 4E-BP1 comme potentielle cible thérapeutique. [Molecular mechanisms of anti-apoptotic function of HDLs on pancreatic beta cells : 4E-BP1 as a potential therapeutic target]

Introduction : Les particules de HDL (High Density Lipoprotein) ont des fonctions diverses notamment en raison de leur structure très hétérogène. Tout d'abord, les HDLs assurent le transport du cholestérol de la périphérie vers le foie mais sont également dotées de nombreuses vertus protectrices. Un grand nombre d'études démontre les mécanismes de protection des HDL sur les cellules endothéliales. Sachant que les patients diabétiques ont ses niveaux bas de HDL, le but de cette étude est d'investiguer les mécanismes moléculaires de protection sur la cellule beta pancréatique. Résultats : Une étude « microarray » nous a permis d'obtenir une liste de gènes régulés par le stress, comme la privation de sérum, en présence ou en absence de HDL. Parmi ces gènes, nous nous sommes particulièrement intéressés à un répresseur de la synthèse protéique « cap » -dépendante, 4EBP1. Dans notre étude transcriptomique, les niveaux d'ARNm de 4E-BP1 augmentaient de 30þ% dans des conditions sans sérum alors que les HDLs bloquaient cette élévation. Au niveau protéique, les niveaux totaux de 4EBP1 étaient augmentés dans les conditions de stress et cette élévation était contrée par les HDLs. D'autres expériences de transfection ou d'infection de 4E-BP1 ont montrés que cette protéine était capable d'induire l'apoptose dans les cellules beta, imitant ainsi l'effet de la privation de sérum. Afin de déterminer le rôle direct de 4E-BP1 dans la mort cellulaire, ses niveaux ont été réduits par interférence ARN. Le niveau de mort cellulaire induit par l'absence de sérum était moins élevé dans des cellules à taux réduits de 4EBP1 par RNAi que dans des cellules contrôle. Conclusion : Ces données montrent que les HDL protègent les cellules beta suite à différents stress et que 4E-BP1 est une des protéines pro-apoptotiques inhibées par les HDL. 4E-BP1 est capable d'induire la mort cellulaire dans les cellules bêta et cette réponse peut-être réduite en diminuant l'expression de cette protéine. Nos données suggèrent que 4E-BP1 est une cible potentielle pour le traitement du diabète.

A fractionally integrated approach to monetary policy and inflation dynamics

This paper relaxes the standard I(0) and I(1) assumptions typically stated in the monetary VAR literature by considering a richer framework that encompasses the previous two processes as well as other fractionally integrated possibilities. First, a timevarying multivariate spectrum is estimated for post WWII US data. Then, a structural fractionally integrated VAR (VARFIMA) is fitted to each of the resulting time dependent spectra. In this way, both the coefficients of the VAR and the innovation variances are allowed to evolve freely. The model is employed to analyze inflation persistence and to evaluate the stance of US monetary policy. Our findings indicate a strong decline in the innovation variances during the great disinflation, consistent with the view that the good performance of the economy during the 80’s and 90’s is in part a tale of good luck. However, we also find evidence of a decline in inflation persistence together with a stronger monetary response to inflation during the same period. This last result suggests that the Fed may still play a role in accounting for the observed differences in the US inflation history. Finally, we conclude that previous evidence against drifting coefficients could be an artifact of parameter restriction towards the stationary region. Keywords: monetary policy, inflation persistence, fractional integration, timevarying coefficients, VARFIMA. JEL Classification: E52, C32

The Persistence of Inflation in OECDCountries: a Fractionally Integrated Approach

The statistical properties of inflation and, in particular, its degree of persistence and stability over time is a subject of intense debate and no consensus has been achieved yet. The goal of this paper is to analyze this controversy using a general approach, with the aim of providing a plausible explanation for the existing contradictory results. We consider the inflation rates of 21 OECD countries which are modelled as fractionally integrated (FI) processes. First, we show analytically that FI can appear in inflation rates after aggregating individual prices from firms that face different costs of adjusting their prices. Then, we provide robust empirical evidence supporting the FI hypothesis using both classical and Bayesian techniques. Next, we estimate impulse response functions and other scalar measures of persistence, achieving an accurate picture of this property and its variation across countries. It is shown that the application of some popular tools for measuring persistence, such as the sum of the AR coefficients, could lead to erroneous conclusions if fractional integration is present. Finally, we explore the existence of changes in inflation inertia using a novel approach. We conclude that the persistence of inflation is very high (although non-permanent) in most post-industrial countries and that it has remained basically unchanged over the last four decades.