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In a parsimonious regime switching model, we find strong evidence that expected consumption growth varies over time. Adding inflation as a second variable, we uncover two states in which expected consumption growth is low, one with high and one with negative expected inflation. Embedded in a general equilibrium asset pricing model with learning, these dynamics replicate the observed time variation in stock return volatilities and stock- bond return correlations. They also provide an alternative derivation for a measure of time-varying disaster risk suggested by Wachter (2013), implying that both the disaster and the long-run risk paradigm can be extended towards explaining movements in the stock-bond correlation.
Predictions of oil prices reaching $100 per barrel during the winter of 2021/22 have raised fears of persistently high inflation and rising inflation expectations for years to come. We show that these concerns have been overstated. A $100 oil scenario of the type discussed by many observers, would only briefly raise monthly headline inflation, before fading rather quickly. However, the short-run effects on headline inflation would be sizable. For example, on a yearover- year basis, headline PCE inflation would increase by 1.8 percentage points at the end of 2021 under this scenario, and by 0.4 percentage points at the end of 2022. In contrast, the impact on measures of core inflation such as trimmed mean PCE inflation is only 0.4 and 0.3 percentage points in 2021 and 2022, respectively. These estimates already account for any increases in inflation expectations under the scenario. The peak response of the 1-year household inflation expectation would be 1.2 percentage points, while that of the 5-year expectation would be 0.2 percentage points.
The conventional wisdom that inflation expectations respond to the level of the price of oil (or the price of gasoline) is based on testing the null hypothesis of a zero slope coefficient in a static single-equation regression model fit to aggregate data. Given that the regressor in this model is not stationary, the null distribution of the t-test statistic is nonstandard, invalidating the use of the normal approximation. Once the critical values are adjusted, these regressions provide no support for the conventional wisdom. Using a new structural vector regression model, however, we demonstrate that gasoline price shocks may indeed drive one-year household inflation expectations. The model shows that there have been several such episodes since 1990. In particular, the rise in household inflation expectations between 2009 and 2013 is almost entirely explained by a large increase in gasoline prices. However, on average, gasoline price shocks account for only 39% of the variation in household inflation expectations since 1981.
Our primary objective is to construct a plausible, unified model of inflation, dark energy and dark matter from a fundamental Lagrangian action first principle, wherein all fundamental ingredients are systematically dynamically generated starting from a very simple model of modified gravity interacting with a single scalar field employing the formalism of non-Riemannian spacetime volume-elements. The non-Riemannian volume element in the initial scalar field action leads to a hidden, nonlinear Noether symmetry which produces an energy-momentum tensor identified as the sum of a dynamically generated cosmological constant and dust-like dark matter. The non-Riemannian volume-element in the initial Einstein–Hilbert action upon passage to the physical Einstein-frame creates, dynamically, a second scalar field with a non-trivial inflationary potential and with an additional interaction with the dynamically generated dark matter. The resulting Einstein-frame action describes a fully dynamically generated inflationary model coupled to dark matter. Numerical results for observables such as the scalar power spectral index and the tensor-to-scalar ratio conform to the latest 2018 PLANCK data.
First, we propose a scale-invariant modified gravity interacting with a neutral scalar inflaton and a Higgs-like SU(2)×U(1) iso-doublet scalar field based on the formalism of non-Riemannian (metric-independent) spacetime volume-elements. This model describes, in the physical Einstein frame, a quintessential inflationary scenario driven by the “inflaton” together with the gravity-“inflaton” assisted dynamical spontaneous SU(2)×U(1) symmetry breaking in the post-inflationary universe, whereas the SU(2)×U(1) symmetry remains intact in the inflationary epoch. Next, we find the explicit representation of the latter quintessential inflationary model with a dynamical Higgs effect as an Eddington-type purely affine gravity.
Exploiting the natural experiment of the German reunification, we examine how consumers adapt to a new environment in their macroeconomic forecasting. We document that East Germans expect higher in inflation and make larger forecast errors than West
Germans even decades after reunification. Differences in consumption baskets, financial literacy, risk aversion or trust in the central bank cannot fully account for these patterns. We find most support for the explanation that East Germans, who were used to a strong norm of zero inflation, persistently overadjusted the level of their expectations in the face of the initial inflation shock in reunified Germany. Our findings suggest that large changes in the economic environment can permanently impede people's ability to form accurate macroeconomic expectations, with an important role for the interaction of old norms and new experiences around the event.
Since the 1970s, the overarching view in the literature has been that a Phillips curve relationship did not exist in Ireland prior to the 1979 exchange rate break with Sterling. It was argued that, as a small open economy, prices were determined externally. To test this relationship, we study the determination of inflation between 1926 and 2012, a longer sample period than any previously used. We find that the difference between unemployment and the NAIRU is a significant determinant of inflation both in the full sample and in the subsamples spanning the periods before and after the Sterling parity link.
In the event of a Greek exit from the Eurozone, the stronger members of the monetary union, especially Germany, face at least two risks: First, the debt of the Greek National Bank vis-à-vis the Eurosystem of central banks will most likely be lost. Secondly, the large flow of capital from Greece and other periphery countries to Germany will accelerate inflation.