Abstract: This paper estimates inflation risk premia using data on prices of Treasury Inflation Protected Securities (TIPS) over the period 2000-2008. The estimation approach used is arbitrage free, largely model free, and easy to implement. It also distinguishes between TIPS yields and real yields by taking into account explicitly the three-month indexation lag of TIPS in the analysis. In addition, we consider three measures of the TIPS liquidity including one new measure based on TIPS prices only. We estimate the liquidity premium to be around 13 basis points over the full sample, but substantially higher in the first subperiod. We find that the inflation risk premium is time-varying and, on average, is considerably lower than suggested by various structural models. Specifically, depending on the proxy used for expected inflation, the average 10-year inflation risk premium ranges from -9 to 4 basis points over the full sample, and ranges between 1 and 6 basis points over the subperiod 2004-2008.

Abstract: ``Inflation-indexed securities would appear to be the most direct source of information about inflation expectations and real interest rates\" (Bernanke, 2004). In this paper we study the term structure of real interest rates, expected inflation and inflation risk premia using data on prices of Treasury Inflation Protected Securities (TIPS) over the period 2000-2008. The approach we use to estimate inflation risk premium is arbitrage free, largely model free, and easy to implement. We also make distinction between TIPS yields and real yields and take into account explicitly the three-month indexation lag of TIPS in the analysis. In addition, we propose a new liquidity measure based on TIPS prices. Accounting for it, we find that the inflation risk premium is time-varying: it is negative (positive) in the first (second) half of the sample period. The average 10-year inflation risk premium ranges from -16 to 10 basis points over the full sample depending on the proxy used for expected inflation. More specifically, the estimates of the 10-year inflation risk premium range between 14 and 19 basis points for 2004-2008 period.

Abstract: This article empirically investigates the impact of inflation targeting on inflation uncertainty. We implement PARCH and GARCH methodologies to model conditional variance of inflation. We also investigate the relationship between level and volatility of inflation to analyze the validity of the Friedman hypothesis for IT countries. We find that most of the inflation targeting countries have significantly lower inflation variances after inflation targeting. In most of the IT countries, the relationship is consistent with the Friedman hypothesis.

Abstract: This paper aims to investigate the direct relationship between inflation and inflation uncertainty by employing a dynamic method for the monthly country–region–place United States data for the time period 1976–2007. While the bulk of previous studies has employed GARCH models in investigating the link between inflation and inflation uncertainty, in this study Stochastic Volatility in Mean models are used to capture the shocks to inflation uncertainty within a dynamic framework. These models allow researchers to assess the dynamic effects of innovations in inflation as well as inflation volatility on inflation and inflation volatility over time, by incorporating the unobserved volatility as an explanatory variable in the mean (inflation) equation. Empirical findings suggest that innovations in inflation volatility increases inflation. This evidence is robust across various definitions of inflation and different sub-periods.

Abstract: The objective of this study is to investigate the relationship between inflation, inflation uncertainty and real output Growth in South East Asian Countries from 1960-2010. GARCH model is used for measuring volatility in inflation and the asymmetric behavior of inflation is captured through E-GARCH model estimation. Inflation uncertainty was captured through Conditional variance of inflation and the relationship between inflation uncertainty, Inflation and Output Growth is measured through the Granger-Causality. Our results are consistent with the Cukierman–Meltzer hypothesis about inflation and inflation uncertainty as there we found no significant relationship between inflation uncertainty and output Growth.

Abstract: This article examines whether core inflation is able to predict the overall trend of total inflation using real-time data in a parametric and nonparametric framework. Specifically, two sample periods and five in-sample forecast horizons in two measures of inflation, which are the Personal Consumption Expenditure (PCE) and the Consumer Price Index (CPI), are used in the exclusions-from-core inflation persistence model. This article finds that core inflation is only able to capture the overall trend of total inflation for the 12-quarter in-sample forecast horizon using the CPI in both the parametric and nonparametric models in the longer sample period. The nonparametric model outperforms the parametric model for both data samples and for all five in-sample forecast horizons.

Abstract: Friedman’s hypothesis regarding the relationship between inflation, inflation uncertainty and output growth states that full employment policy objective of the government tends to increase the rate of inflation which increases the uncertainty about the future course of inflation. Increase in inflation uncertainty lowers economic efficiency and reduces output growth. Most of the studies to test the Friedman hypothesis are made for the developed countries. There are very few studies for underdeveloped countries particularly for India regarding the relationship between inflation, inflation uncertainty and output growth. Thornton’s (2006) study regarding the relationship between inflation and inflation uncertainty in India is univariate in nature and it cannot establish the relationship between inflation uncertainty and output growth. This study intends to use the bivariate GARCH model to find out the relation between inflation, inflation uncertainty and output growth simultaneously. In this study we use monthly data of wholesale price index (WPI) and index of industrial production (IIP) of India as the proxies of price and output respectively from 1950:1 to 2009:8. Following Fountas, Karanasos and Kim (2002) we have used the following bivariate GARCH model to estimate simultaneously the means, variances and covariances of inflation and output growth. We use Granger- causality test to know the statistical relationship between average inflation, output growth, inflation uncertainty and output growth uncertainty. We find strong evidence that increase in average inflation raises inflation uncertainty and increase in growth rate increases the growth rate uncertainty. But we do not find any statistically significant relationship between inflation uncertainty and output growth rate. This analysis suggests that price stability must not be the main focus of policy prescription.

Abstract: Twenty-six industrialized and emerging countries have adopted inflation targeting monetary policy since 1990 to contain escalating inflation rate. If both the level and volatility of inflation rate have diminished perceptibly for these countries since their adoption of inflation targeting policy, as evidence overwhelmingly suggests, then the predictive performance of inflation forecasting models should have improved unambiguously for these countries after they adopted inflation targeting policy. Furthermore, inflation forecasts generated by a time-series model should be more accurate than those generated by either a structural model or a naive model after the adoption of inflation targeting policy. In this study, the predictive performance of three alternative inflation forecasting models - univariate time-series (ARIMA) model, Phillips curve model, and naive model - are carefully evaluated for a selected number of inflation-targeted countries. It is found that these models generate more accurate forecasts of inflation rate for the period following the adoption of inflation targeting policy. Furthermore, out-of-the-sample inflation forecasts generated by an ARIMA model are found to be more accurate than those generated by the other two forecasting models for most countries, especially for the period following the adoption of inflation targeting policy.Keywords: Inflation targeting, inflation forecasting models, predictive performance comparison.JEL codes: C53, E31(ProQuest: ... denotes formulae omitted.)IntroductionTwenty-six industrialized and emerging countries (8 industrialized and 18 emerging countries) have adopted inflation targeting monetary policy since 1990 to combat persistently high inflation rates and inflation volatility. The first country to formally adopt an inflationtargeting policy was New Zealand (1990), which was followed by Canada (1991), Chile (1991), Israel (1992), United Kingdom (1992), Peru (1994), Australia (1994), and Sweden (1995)1. Eighteen other countries have adopted inflation targeting policy since 19952. Given the success that many of these countries have experienced in containing persistently high inflation rate, it is widely anticipated that other countries will soon adopt inflation targeting policies3.Inflation targeting monetary policy accords either the government and/or the central bank the authority to assign an explicit numerical target for the inflation rate and implement an appropriate monetary policy to achieve its inflation target4.The proponents of this policy have long claimed that inflation targeting would not only reduce inflation rate, inflation volatility, output volatility, and interest rates, but also enhance both the transparency and accountability of the monetary policy. The central bank with an explicit inflation target has to regularly publish and disseminate reports stating the bank's forecast of future inflation rate based on its outlook on the economy, the rationale for the target chosen, and the specific nature of the monetary policy to be implemented to achieve the target. Subsequently, the central bank must periodically issue reports providing an objective assessment of the success (or lack thereof) the bank has experienced in its attempt to meet the target it has chosen. Therefore, in such an environment, the central bank's decisions and the outcome of its decisions will be monitored closely by both the government and media.Empirical evidence on the merits of inflation targeting policy, however, remains somewhat inconclusive. Bernanke, Laubach, Mishkin, and Posen (1999) and Mishkin and Schmidt-Hebbel (2007) found that inflation targeting reduces inflation rate, inflation volatility, interest rates, and output growth volatility for all countries that adopted this strategy. Specifically, Mishkin and Schmidt-Hebbel showed that the average inflation rate for inflationtargeting countries has dropped from 12. …

Abstract: Governments make revenue from issuing money. This revenue is called seigniorage and in general consists of two parts, namely the rising demand for money to keep up with the growth of economy and the "inflation" tax. This paper uses a panel threshold regression model to study whether a non- linear relationship between inflation Tax and inflation in 129 developing countries based on two regimes of inflation (low and high inflation regimes). Empirical results indicate the Laffer curve in inflation tax exists in 129 developing countries. The threshold inflation rate is 6.7%. Therefore, in low inflation regime (inflation rate is less than 6.7%), The inflation rate has a significantly positive impact on inflation tax. By contrast, when inflation rate is in high regime (inflation rate is larger than 6.7%), the inflation rate has a significantly negative impact on inflation tax.

Abstract: This paper investigates inflation persistence under Threshold Autoregressive (TAR) model motivated by the fact that inflation in Nepal goes through different degrees of persistence based on various regime shifts. Using monthly time series of the Consumer Price Index (CPI) from 1998:01 to 2011:12, the presence of dynamic adjustment of inflation between high inflation and low inflation regimes defined by threshold inflation reveals non-linear behavior of inflation. A degree of low persistency is found in the high inflation regime. Low inflation persistence in high inflation regime signifies that inflation do not remain for a long period of time as a result of policy shocks pursued to trigger inflation down. Therefore, the policy shocks (such as monetary and fiscal policies) to bring inflation into low inflation regime cannot be ruled out in Nepal. Further, as the variance of the inflation shocks above the threshold is found greater than below the threshold, the policy shocks as well as shocks emanating from supply constraint and foreign inflation shocks are responsible in switching inflation from above the threshold to below the threshold.

Abstract: Inflation rates across countries tend to exhibit a degree of co-movement. In this paper we use a panel vector autoregression (panel VAR) model to investigate possible explanations of this co-movement for the G7 economies. Shocks to commodity prices are found to be more important than common movements in real activity as a driver of 'global inflation' dynamics. However, commodity prices and common real activity cannot explain all of the co-movement in inflation. Even when controlling for these factors, a common indicator of inflation still offers explanatory power for domestic inflation in the panel VAR. Given the role of global inflation in explaining inflation in the G7 countries, we then consider the significance of global inflation for Australian inflation. We find that movements in international inflation offer useful information when included in models of Australian inflation, particularly headline inflation.

Abstract: Laffer curve shows a nonlinear relationship between inflation rate and inflation tax. The present t research estimates Laffer curve function for the period 1974-2007 in Iran using the regression models under different scenarios for measuring the inflation tax. We have also used money demand function proposed by Aegnor and Montiel (1996). Our findings Indicate the justification of a bell shaped Laffer curve for the period under consideration in Iran. The inflation rate consistent with the maximum capacity of inflation tax is in the range of 22-78 percent in Iran.

Abstract: Enhanced Indexation is the problem of selecting a portfolio that should produce excess return with respect to a given benchmark index. In this work we propose a linear bi-objective optimization approach to Enhanced Indexation that maximizes average excess return and minimizes underperformance over a learning period. Our model can be efficiently solved to optimality by means of standard Linear Programming techniques. On the theoretical side, we investigate conditions that guarantee or forbid the existence of a portfolio strictly outperforming the index. We also support our model with extensive empirical analysis on publicly available real-world financial datasets, including comparison with previous studies, performance and diversification analysis, and verification of some of the proposed theoretical results on real data.

Abstract: 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 in underlying 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.

Abstract: Using simple statistical methods, this note examines the relationship between expected and actual inflation and the importance of inflation expectations in driving actual inflation in Asia. We find that, in Asia, short-term inflation expectations tend to co-move among economies while international energy and food price inflation seems to be an important driver of inflation expectations. The analysis of impulse responses also suggests that inflation expectations appear to play an important role in driving actual inflation, with expectation shocks having significant dynamic effects on actual inflation in many Asian economies.

Abstract: We examine the behaviour of national and provincial inflation in Canada under inflation targeting to determine the extent to which the inflation targeting regime adopted by the Bank of Canada in the 1990s has anchored inflation expectations. Inflation expectations are well anchored when there are no predictable departures of inflation from target at sufficiently distant horizons. To examine this condition, we consider the out of sample prediction of monthly inflation with specific focus on whether deviations from the 1-3% target band are consistently predictable. We find support for well anchored inflation expectations at the national level and some but not all provinces.

Abstract: Based on a theoretical study on the interaction between inflation expectations and actual inflation,this paper employs the Carlson-Parkin method to measure Chinese urban consumer inflation expectations.Then an empirical analysis of the interaction mechanism between inflation expectations and Chinese actual inflation is provided.The results show that actual inflation is the Granger-causality of inflation expectations.Chinese urban consumer inflation expectations are adaptive rather than rational in nature.We suggest that the independence of China's monetary policy should be enhanced,the statistical survey system of price and inflation expectations should be improved and public communication should be made actively by different channels.

Abstract: Enhanced Indexation is the problem of selecting a portfolio that should produce excess return with respect to a given benchmark index. In this work we propose a linear bi-objective optimization approach to Enhanced Indexation that maximizes average excess return and minimizes underperformance over a learning period. This can be formulated as a simple Linear Programming problem that is solved to optimality by standard LP codes. Moreover, we investigate conditions that guarantee or forbid the existence of a portfolio strictly outperforming the index. We present extensive computational analysis of the results on publicly available real-world nancial datasets, including comparison with previous results, performance and diversi cation analysis, and empirical veri cation of some of the proposed theoretical results.

Abstract: We study the effects of positive steady-state inflation in New Keynesian models subject to the zero bound on interest rates. We derive the utility-based welfare loss function taking into account the effects of positive steady-state inflation and solve for the optimal level of inflation in the model. For plausible calibrations with costly but infrequent episodes at the zero-lower bound, the optimal inflation rate is low, typically less than two percent, even after considering a variety of extensions, including optimal stabilization policy, price indexation, endogenous and state- dependent price stickiness, capital formation, model-uncertainty, and downward nominal wage rigidities. On the normative side, price level targeting delivers large welfare gains and a very low optimal inflation rate consistent with price stability. These results suggest that raising the inflation target is too blunt an instrument to efficiently reduce the severe costs of zero-bound episodes.

Abstract: Inflation targeting -- the central bank practice of attempting to keep inflation levels within fixed bounds around a quantitative target -- has been adopted by more than twenty economies. Such practice has an important impact on the stochastic nature of inflation and, consequently, on the pricing of inflation derivatives. We develop a flexible model of inflation targeting in which the central bank's intervention to steer inflation towards the target depends on past deviations and the policymaker's ability or will to enforce the target. We use our model to price inflation derivatives and demonstrate the impact of inflation targeting on derivative pricing.

Abstract: This study is going to examine the relationship among consumer price index (CPI), economic performance, and wheat support prices in order to determine the level of inflation in case of Pakistan. The analysis is made on the monthly time series data from January-1990 to December-2010. The CPI is used as an inflation indicator by taking the percentage change; the GDP is used as the growth variable for measuring economic performance. The ARDL technique had been used to investigate such relationship. The results derived by applying Wald Test suggest that there is a long run cointegrated relationship among the CPI, economic performance and wheat support price. In the short run, the wheat price does affect the inflation. The causality test results show that there is only unidirectional causality between wheat price and rate of inflation. In the end, it is suggested that the tight monetary policy is the not the solution of problem in order to control inflation, on other hand fiscal policy is also contributing in inflation.