Does Inflation Targeting Affect the Trade–off Between Output Gap and Inflation Variability?

Arestis, Philip; Caporale, Guglielmo Maria; Cipollini, Andrea

doi:10.1111/1467-9957.00299

Cited by 36 publications

(17 citation statements)

References 30 publications

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“…That is, in the context of already declining inflation, it is hard to isolate a major influence of inflation targeting rules. This is in line with broader evidence that interest rates have little influence on the rate of inflation, as argued by Arestis and Sawyer (2004), and that a output-inflation volatility tradeoff has questionable empirical support (Arestis, Caporale, Cipollini 2002). …”

Section: Post-keynesian Inflationsupporting

confidence: 85%

Wages, Exchange Rates, and the Great Inflation Moderation: A Post-Keynesian View

Perry

Cline

2013

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in Nathaniel Cline University of Redlands March 2013The Levy Economics Institute Working Paper Collection presents research in progress by Levy Institute scholars and conference participants. The purpose of the series is to disseminate ideas to and elicit comments from academics and professionals.Levy Economics Institute of Bard College, founded in 1986, is a nonprofit, nonpartisan, independently funded research organization devoted to public service. Through scholarship and economic research it generates viable, effective public policy responses to important economic problems that profoundly affect the quality of life in the United States and abroad. ABSTRACTSeveral explanations of the "great inflation moderation" have been put forth, the most popular being that inflation was tamed due to good monetary policy, good luck (exogenous shocks such as oil prices), or structural changes such as inventory management techniques.Drawing from Post-Keynesian and structuralist theories of inflation, this paper uses a vector autoregression with a Post-Keynesian identification strategy to show that the decline in the inflation rate and inflation volatility was due primarily to (1) wage declines and (2) falling import prices caused by international competition and exchange rate effects. The paper uses a graphical analysis, impulse response functions, and variance decompositions to support the argument that the decline in inflation has in fact been a "wage and import price moderation," brought about by declining union membership and international competition. Exchange rate effects have lowered inflation through cheaper import and oil prices, and have indirectly affected wages through strong dollar policy, which has lowered manufacturing wages due to increased competition. A "Taylor rule" differential variable was also used to test the "good policy" hypothesis. The results show that the Taylor rule differential has a smaller effect on inflation, controlling for other factors.

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Section: Post-keynesian Inflationsupporting

confidence: 85%

Wages, Exchange Rates, and the Great Inflation Moderation: A Post-Keynesian View

Perry

Cline

2013

SSRN Journal

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“…That is, in the context of already-declining inflation, it is hard to isolate a major influence of inflation-targeting rules. This is in line with broader evidence that interest rates have little influence on the rate of inflation, as argued by Arestis and Sawyer (2004), and that an output-inflation-volatility trade-off has questionable empirical support (Arestis et al 2002).…”

Section: Post-keynesian Inflationsupporting

confidence: 82%

What caused the great inflation moderation in the US? A post-Keynesian view

Perry¹,

Cline²

2016

ROKE

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Several explanations of the 'great inflation moderation ' (1982-2006) have been put forth, the most popular being that inflation was tamed due to good monetary policy, good luck (exogenous shocks such as oil prices), or structural changes such as inventory management techniques. Drawing from post-Keynesian and structuralist theories of inflation, this paper uses a vector autoregression with a post-Keynesian identification strategy to show that the decline in the inflation rate and inflation volatility was due primarily to (i) wage declines and (ii) falling import prices caused by international competition and exchange-rate effects. The paper uses a graphical analysis, impulse response functions, and variance decompositions to support the argument that the decline in inflation has in fact been a wage and import price moderation. A Taylor rule differential variable was also used to test the 'good policy' hypothesis. The results show that the Taylor rule differential has a smaller effect on inflation, controlling for other factors.

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“…Monthly frequency data allow us to use the family of multivariate GARCH models. Looking at the relevant multivariate GARCH literature, a number of studies (see, for instance, Arestis, Caporale, and Cipollini 2002;Caporale and Grier and Perry (2000) and Grier, Henry, Olekalns, and Shields (2004), sought to estimate not only the variances but also the conditional means and the covariance of inflation and output growth through bivariate GARCH models. Given the debate about the directional effects between the inflation gap and the output gap, 6 we model the joint process governing the two variables using the bivariate VAR(2,2)-GARCH(1,1) model.…”

Section: The Modelmentioning

confidence: 99%

The effect of the market-based monetary policy transparency index on inflation and output variability

Papadamou

Arvanitis

2014

International Review of Applied Economics

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This paper examines empirically the effectiveness of the Federal Reserve's policy under different levels of transparency by using a dynamic and continuous market-based index proposed by Kia (2011) on inflation volatility and output volatility. In theory, the more transparent the monetary policy, the less volatile the money market will be with fewer disturbances and thus the more stable will be the economy. First, a bivariate VAR-BEKK-GARCH(1,1) model is estimated for inflation and output variables in the US economy in order to produce conditional variances and covariance over the period October 1982 to December 2011. Second, by incorporating conditional variances and transparency in a VAR model, impulse response functions reveal that after a positive shock in the Federal Reserve's transparency (i.e. market participants consider the Federal Reserve's actions to be more transparent), there is a statistically significant decrease in both inflation volatility and output volatility. Our results reveal the dynamic and crucial role that a central bank's transparency plays in retaining economic stability and assuring the forecasts concerning inflation and economic growth made by the economic units.

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Does Inflation Targeting Affect the Trade–off Between Output Gap and Inflation Variability?

Cited by 36 publications

References 30 publications

Wages, Exchange Rates, and the Great Inflation Moderation: A Post-Keynesian View

Wages, Exchange Rates, and the Great Inflation Moderation: A Post-Keynesian View

What caused the great inflation moderation in the US? A post-Keynesian view

The effect of the market-based monetary policy transparency index on inflation and output variability

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