phd thesis on inflation

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Globalization, inflation and monetary policy

Fatima, Kaneez (2013) Globalization, inflation and monetary policy. PhD thesis, University of Glasgow.

The thesis is aimed at investigating the implications of globalization for the conduct of monetary policy. By globalization we mean increased interdependence of national economies as reflected in greater and freer flow of goods, services, capital, and labour across national borders. In particular, our research addresses a number of important issues in the recent monetary policy and globalization debate. First, are global factors becoming important drivers of domestic inflation? Second, are global factors playing more powerful role on inflation dynamics in the sectors of an economy that are more open to trade? Third, has globalization made the job of Central Bankers more difficult? And finally, do the Central Bankers in the United States and the United Kingdom consider international factors too along with domestic factors while determining the short term interest rates?

Inflation rates have been observed to be low across industrial countries since the early 1990s. The co-movements of inflation rates across countries are strikingly high. We model the co-movements of inflation rates by a global factor, regional factors and idiosyncratic component. In particular, we estimate a Dynamic Factor Model with Stochastic Volatility and find that the contribution of the global factor has increased over time in explaining the variance of inflation in OECD countries. The regional factor also gains importance in countries with strong intra-regional economic linkages potentially due to proliferation of regional trade agreements and common currency areas. In the European countries, the role of global and regional factor together dominates the country specific factor since the late 1990s. The volatility of inflation has substantially decreased over time and our modelling framework incorporates time varying volatility of inflation. We find strong positive and significant relationship between the international common factor and economic globalization. Consistent with inflation becoming a global phenomenon, co-movements of aggregate inflation between countries are observed to be high. We examine whether this is also the case for sectoral inflation, we model the co-movements in sectoral inflation as being associated with a global factor, a sector specific factor and an idiosyncratic error term. We find that the co-movements of inflation of tradable sectors are substantially greater than the co-movements in non-tradable sectors which implies that the greater co-movements of inflation can be attributed to increased trade global integration of product markets. To test this, we attempt to find empirical relationship between the estimated common factor in sectors and openness to trade measured as import penetration. A positive relationship is found between the estimated sector specific common factors and import penetration.

Given our earlier chapters identify important global dimension to aggregate and sectoral inflation, does this matter for monetary policy? The implication of globalization for monetary policy in the United States and the United Kingdom are examined by estimating monetary policy reaction function for these advanced economies over the sample period 1985-2010. We also consider time variations in these reaction function by estimating over a sub-sample of 1992-2010 for the United Kingdom and the Greenspan-Bernanke Era for the United States. We estimate the policy reaction function with domestic and global inflation and output gaps and with the component of domestic inflation and output gap that is not related to global variations. The policy reaction function augmented with foreign variables such as real effective exchange rate and foreign interest rate is also estimated. We use measures of inflation based on GDP deflator, CPI and inflation expectations. We find that the Federal Reserve responds to global inflation only in the full sample and to global as well as the country specific inflation in the second sub-sample (Greenspan-Bernanke Era). This may imply strong commitment of the Federal Reserve to the goal of ``price stability'' during Greenspan-Bernanke Era. The Bank of England responds to global inflation along with the country specific inflation. The international factors such as the real effective exchange rate changes (depreciation) and foreign interest rates have significant and positive effect on policy rates.

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Final thesis on determinants of inflation in Ethiopia

2021, academia

Inflation is defined as a persistent increase in general price level of goods and services. Even though Ethiopia has experienced a low inflation until 2002/3, recently, double digit inflation has become troublesome for policy makers as well as the society. Therefore, this study was carried out to identify the major determinants of inflation in Ethiopia by employing the techniques of Auto-Regressive Distributed Lag Model (ARDL) for 32 years’ data starting from 1987/88 to 2018/19. The study included macroeconomic determinants and non-economic factor that alter inflation level measured by consumer price index such as, real gross domestic product, nominal exchange rate, broad money supply, external debt, foreign aid, tariff rate and dummy for political stability. The results of bounds test confirmed that there is a long run relationship between the explanatory variables and consumer price index in Ethiopia. The empirical result implied evidence of a long-run positive and significant (p-value<0.05) effect of nominal exchange rate, broad money supply, external debt and foreign aid with coefficients 1.130896, 1.980892, 1.641140 and 2.513185, respectively on inflation in Ethiopia whereas real gross domestic product and dummy of political stability significantly (p-value<0.05) and negatively affect price level with coefficients -5.371298 and -3.698385, respectively in the long run. Finally, from the finding of the study in the short run, broad money supply and external debt has positive and significant (p-value<0.05) effect on inflation in Ethiopia with coefficients 0.292621 and 0.1699, respectively. Real gross domestic product and dummy for political stability are also the main significant (p-value<0.05) determinants of inflation with negative coefficients (I.e. - 0.793457 and -0.495005, respectively) in the short run. Given these findings, the monetary policy should be planned to maintain price stability by controlling the growth of money supply and devaluation of the domestic currency in the economy. Also combined efforts should be made by policy makers to increase the supply of output so as to reduce the prices of goods and services and there should be democratic political discussions among the political parties to reduce the political conflicts and instabilities.

Related Papers

Determinants of inflation-Mebtu Melaku

Mebtu Melaku

Inflation, one of the basic indicators of macroeconomic stability, affects many other macroeconomic variables and it weakens the economy if it goes beyond a specified threshold level. The main objective of the study is finding out the determinants of inflation in Ethiopia. The paper uses secondary data collected from National Bank of Ethiopia and other sources. The ARDL model to co integration has been used to find out the short run and long run determinants of inflation. Findings showed that in the long run oil price, government expenditure and Broad money supply affect inflation positively at 5%, 1% and 1% respectively. However external debt and real GDP affect inflation negatively at 1% and 5% in the long run. But real exchange rate is found to be insignificant in the long run. While in the short run real exchange rate and government expenditure affect inflation positively at 5% and 1% respectively. On the other hand real GDP affects inflation negatively at 10% in the short run. But external debt, money supply and oil price are found to have insignificant effect on inflation in the short run. More over the error correction term estimated at-0.882 is significant at 1% significance level and has the recommended negative sign. Results confirm that both cost push and demand pull factors contribute to inflation in Ethiopia. The findings from this study reveal that inflation can be controlled by reducing money supply, government expenditure and oil price and by increasing external debt and real output.

Journal of Economics and Sustainable Development

Getachew Kebede

World Bank Policy Research Working Paper

Pure Nyakasonzoro

Asmamaw Mulusew

Like many countries, one of the most fundamental objectives of macroeconomic policies in Ethiopia is to sustain high economic growth with low inflation. The relationship between growth and macroeconomic variables is one, which many economists have watched with keen interest. This paper investigates the relationship between growth and inflation based on unstructured VAR model. The methodologies used in this study are the cointegration, Granger causality and vector error correction model test. Consumer price index (CPI) was used as a proxy for inflation and the real GDP as a perfect proxy for economic growth to examine the relation. The scope of the study spanned from 1976-2010. A stationary test was carried out using Graphical approach and Augmented Dickey Fuller test (ADF) and Phillip-Perron test (PP) and stationarity found at first difference at 5% level of significance. The Johnson cointegration test using Trace statistic and Maximum eigenvalue test result showed that for the periods, 1976-2010, there was long run co-integrating relationship between growth, inflation and the selected macroeconomic variable broad money supply. Based on the result economic growth and inflation has a negative relationship with low standard error value implying a low statistical noise in the estimates. A positive relationship was found between inflation and broad money supply with low standard error in the long run. The relations are statistically significance at 10% level of significance for both independent variables. Similarly, in the short run inflation level of last year and real GDP negatively and significantly affecting the inflation level. While broad money supply positively related with inflation level. Moreover the result reveals that the coefficient of the error-term or the speed of adjustment term for the estimated inflation equation is both statistically significant and negative. Implying that, if actual equilibrium value is too high, the speed of adjustment will reduce it and if it is low, the error correction term will raise it. The coefficient term -0.481111 shows that 48 % adjustment will be taken each year to converge to the long run equilibrium level. The parsimonious model and variance decomposition approach confirmed the result. And, Granger causality test results showed unidirectional causality. Therefore, the study advices Policy makers to adopt inflation targeting strategy, taking combined fiscal and monetary policy together, regulations on commercial financial lending institutions and government should curtail unproductive expenditure.

Tiblet Shitu

While inflationary sources have been linked with various issues, its attachment to money supply had especial consideration in inflation theories. The Classical version of Quantity Theory holds for inflation as being 'always and everywhere a monetary phenomenon'. On the other side, Keynes's version departed by claiming neutrality of money in an economy where idle capacity exists. Motivated basically by these theoretical departures on the link between the two variables, and the limited availability of literatures particularly in the spirit of the subject it is concerned with, the present study aimed to empirically examine the share of money supply in explaining the dynamics of inflation in Ethiopia, using Error Correction Model by employing the time series data set for the period ranging from 1974/75 to 2014/15. The Johnson's Maximum likelihood approach for cointegration has indicated the existence of long run relationships amongst variables entered the inflation model. Abstract-While inflationary sources have been linked with various issues, its attachment to money supply had especial consideration in inflation theories. The Classical version of Quantity Theory holds for inflation as being 'always and everywhere a monetary phenomenon'. On the other side, Keynes's version departed by claiming neutrality of money in an economy where idle capacity exists. Motivated basically by these theoretical departures on the link between the two variables, and the limited availability of literatures particularly in the spirit of the subject it is concerned with, the present study aimed to empirically examine the share of money supply in explaining the dynamics of inflation in Ethiopia, using Error Correction Model by employing the time series data set for the period ranging from 1974/75 to 2014/15. The Johnson's Maximum likelihood approach for cointegration has indicated the existence of long run relationships amongst variables entered the inflation model. Moreover, the Augmented Dickey Fuller (ADF) and Phillips Perron (PP) Unit Root tests confirmed that the variables concerned are all integrated of order one, (I(1)). ECM regression suggest that money supply, real Gross Domestic Product, trade openness, real exchange rate, budget deficit and the nominal deposit interest rate variables have together been important in explaining the long run dynamics of inflation. Except real Gross Domestic Product and nominal deposit interest rates, the effects of the remaining ones persist also in the short run. Moreover, money supply was estimated to impose the dominant effect towards validating the classical version of QTM in the context of Ethiopian economy. Besides, monetary policy is found to be more important in the dynamics of inflation compared to fiscal policy. Furthermore, VAR Granger Causality test suggests the causation running from budget deficit to money supply; and, from money supply to inflation, but no causality was suggested in reverse. This also reveals partly the applicability of the Sargent and Wallace (1981) aspect of the so called 'fiscal dominance' in Ethiopia. Finally, the study suggests for the enhancement of effectively designed and implemented network of both monetary and fiscal policies considering the power of money supply on inflation. Moreover, investments in food and agricultural sectors could considerably support the process of ensuring price stability.

The determinant of inflation in puntland

Suleiman Abdi Jama , suleiman jama

Purpose: In many Africa countries it is challenging for monetary authorities to control inflation even if there is a political will, due to weak institutional frameworks, thin financial markets and imperfect competition among banks. The purpose of this study therefore was to investigate the determinants of inflation in the Puntland economy. Methodology: An explanatory research design was adopted.The study was carried out in Puntland. The study used data from secondary sources only.The study employed an empirical test of the relation between inflation and the determining factors. Results: These results imply that Price fluctuations and Lag inflation rates greatly affect inflation rate positively while real GDP growth affects inflation rate negatively. The findings also showed that Money supply growth, Foreign Exchange rate and interest rate ha have a significant relationship with inflation. Based on the findings above the study concluded that real GDP growth, price fluctuations (changes in goods prices) and the previous period’s inflation rate (lag inflation rate) are the ideal factors that affect inflation in Puntland.

Megersa Nugusa

The study was carried out to assess and examine the macroeconomic determinates of inflation in Ethiopia. In addition to this the macroeconomic variables which determined inflation in the country are the main objective of the study. We estimate models of inflation to identify the importance of factors contribution to inflation and three of its major components: RGDP, INVT,

European Journal of Business Science and Technology

Samuel Tolasa

Tekilu Tadesse

Inflation is defined as a persistent increase in general price level of goods and services . Even though Ethiopia has experienced a low inflation until 2008, recently, double digit inflation has become troublesome for policy makers as well as the society. So, this study tried to examine the supply and demand side determinant of inflation in Ethiopia by employing the techniques of Auto-Regressive Distributed Lag Model (ARDL) for 32 years’ data spanning from 1985 to 2016. The study included macroeconomic determinant that alter or change inflation level measured by consumer price index such as money supply, real gross domestic product, world oil price, budget deficit and real effective exchange rate. The results of bound test confirmed that the long run relationship between explanatory variables and consumer price index in Ethiopia. The empirical results implied evidence of a long-run positive impact of money supply, world oil price, budget deficit and real effective exchange rate on ...

Research Paper

AMANUEL TAFESSE

Ethiopian economy is one which has experienced consistently a high exchange rate depreciation and money supply with unstable inflation rate for the last many years. The main objective of the study was to examine the effect of money supply and exchange rate on inflation in Ethiopia by using annual time series data over the period from 1980 to 2021. For this purpose both descriptive and econometrics methods of analysis, such as the Classical OLS long run regression, Engle-granger causality and Error correction models were employed. The result of the study revealed that both money supply and real effective exchange rate have a positive and statistically significant effect to influencing inflation rate, in the long run as well as short run. Moreover, the result revealed that there are 3 bi-directional of granger causality (MS and CPI, CPI and REER and MS and REER). Based on these results, the following recommendations are proposed. NBE should be reduced and restricted the borrowing interaction with government, ministry of finance in particular. NBE should have to exercise a natural rights gives for central banks. Specifically, an operational independency is the core and decisive right that one central bank must use to achieve its objective like price stability as well as it's the most important right to manage the stock of money in the economy. .

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Could inflation come back?

Key takeaways

• Inflation might continue to hover around or above 3% over both the near term and longer term as inflationary pressures persist.
• One of the key questions facing the US economy right now is whether monetary policy is facing greater lags, or is less impactful, than it has been in the past in slowing price rises.
• Higher inflation could reduce the diversification benefits of a traditional stock-bond portfolio, and potentially make inflation hedges like commodities and Treasury Inflation-Protected Securities (TIPS) more attractive.

It’s been nearly 2 years since inflation’s dramatic recent peak in June of 2022, when the US inflation rate flirted with double-digit territory for the first time in a generation.

While inflation has come down significantly since then, progress in reducing the rise of prices has slowed.

Viewpoints sat down recently with Collin Crownover, PhD, the lead inflation analyst on Fidelity’s Asset Allocation Research Team, for a candid chat about his outlook. Here are excerpts from our conversation about where inflation goes from here, whether the low-inflation era might be gone for good, and why your coffee runs might get more expensive this year.

Sign up for Fidelity Viewpoints weekly email for our latest insights.

Viewpoints : What's your outlook for inflation over the rest of this year and into next?

Crownover:  My thesis has long been that a good chunk of the nasty inflation the US experienced in 2022 was going to fade. But there are some remaining drivers of inflation that are proving more persistent. So I actually think the decline in inflation that we’ve seen—or as us geeks call it, “disinflation”—is largely done, and it’s going to be much harder to get inflation down further from here.

To put numbers on that view, I think inflation may get down to around 3% by the middle of this year, but then could actually tick up slightly in the second half of the year. Into next year, I think inflation could stay persistently above 3%.

Viewpoints : What are the key drivers behind that?

Crownover: Not only has the US not seen a recession, we haven’t gotten close to seeing a recession yet. So robust growth is a key factor behind inflation potentially staying higher.

More specifically and perhaps more importantly is that unemployment is still very low by historical standards—even though it’s up slightly from its recent lows. My favorite measure for looking at wage growth—the Atlanta Fed’s Wage Growth Tracker—has still been running at close to 5%. Wages are a huge input cost in many parts of the economy, but particularly in service-based sectors. Companies generally need to pass those higher costs along to consumers in the form of higher prices. Higher wages also mean consumers have more money. All else being equal, if I have more money in my bank account I’m going to spend some of it, so that increases the demand for goods which also pushes up prices.

It’s hard to square the circle of wages going up by 5% but inflation actually coming down to 2%.

Viewpoints : What about 2 of the main inflation pain points for many people: energy and housing?

Crownover: Energy is particularly challenging to forecast because of the role OPEC (Organization of the Petroleum Exporting Countries) has in influencing prices. That said, I've been seeing some increases in inflationary pressures in commodities more broadly. It’s not as bad as what we saw during the height of the pandemic—when supply-chain issues were at their worst—but there seem to be some hot spots due to weather and climate issues. Cocoa and coffee are 2 commodities that have suddenly become in really short supply. So that may turn into higher food prices later in the year, and you might not be happy when you go to buy a coffee.

In housing, the real issue is a lack of supply. The US is about half a million units short of for-sale inventory, relative to where we were pre-pandemic. I’m not seeing a huge swell of new supply coming on the market. In certain cities, yes, but not nationally. And so while I do think we’ll see inflation in home prices come down a bit, I believe it may only come down to about 4% or 5%.

Viewpoints : How has the soft-landing narrative impacted your outlook? A year ago it seemed like a given that a recession was on the way. But now, the consensus seems to be that we have a good shot at avoiding one entirely.

Crownover: It’s definitely influenced the outlook. All else being equal, if demand is higher than expected, that will also push inflation higher.

Now, is the US really going to experience a soft landing? I don’t think that’s settled yet. History has shown that monetary policy actions—especially rate hikes—can take a very long time to impact the real economy. And it hasn’t even been a year yet since the Fed’s last rate hike.

You could make a plausible argument that it’s going to take even longer this time because so many people aren’t affected by higher interest rates in their day to day, because they’ve locked in 30-year mortgages at 3% interest rates.

That’s one of the major questions I’m looking at: Is monetary policy less effective now, because the economy is less sensitive to interest rates than it used to be? Or is it every bit as effective as it has been in the past—it just has longer lags this time?

Viewpoints : So your baseline scenario is inflation might level out later this year at a bit above 3%. What could you imagine throwing that outlook off, and moving the needle higher or lower?

Crownover: If the economy eventually runs into trouble, and the US does see a recession, it could bring inflation lower.

Another issue that could pull inflation lower is what’s happening in China. China has been experiencing a downturn in its property market, which has been a headwind to growth. But it appears that to try to offset that, the country has been pumping up manufacturing—in an aim to increase exports. Now, trade is actually a smaller portion of US gross domestic product (GDP) than you might assume. But all else equal, an increase in the supply of goods from China could create some deflationary pressures.

On the other side, what could lead inflation to be higher than anticipated? There's a lot of evidence from investors’ and consumers’ behavior that financial conditions aren’t actually very restrictive. So that’s the side of the debate where you’re saying, “it’s not that the lags are longer—monetary policy is less effective than it used to be.”

In that case perhaps growth stays robust, and there’s no reason inflation couldn't accelerate from here.

Viewpoints : What about the longer-term view? Is 3% the new normal?

Crownover: There are some inflationary longer-term trends that might keep us at closer to 3%, rather than 2%.

One reason is demographics. The US has an aging population. On the one hand, people generally spend less once they retire, which all else equal should reduce inflation. But that’s more than outweighed by the inflationary impact on wages—because so many people leaving the workforce may create a worker shortage, pushing up wages.

Another issue is productivity. What the US has seen over the last 20-plus years has been steadily declining productivity. The reasons for this are complex . But the end effect is the lower your productivity, the more expensive it is for companies to produce what they produce, and the more those costs get passed on to the end consumer.

A third is peaking globalization. That’s not to say globalization is going in reverse, but it’s really flattened out. Globalization has been a powerful disinflationary force in recent decades, because the US has been able to trade with countries that can make certain goods more efficiently and cheaply. So I'm seeing an end to that disinflationary pressure.

And finally, consumers’ long-run inflation expectations are also higher. Inflation can be a self-fulfilling prophecy. If I expect inflation to be higher I’m going to demand higher wages—if I can. That can create a feedback loop.

That said, it’s important to remember that the US has had 3% inflation before and it’s been fine. In fact, the long-run historical norm has actually been closer to 3% than the 2% experienced for, say, the couple of decades before the pandemic.

But it does require an adjustment for people. You have to start thinking about inflation more when it’s at 3% than you do when it’s 2%.

Viewpoints : What might 3% long-term inflation mean for investors?

Crownover: At 3% inflation, investors may get less diversification benefit from holding a traditional mix of stocks and bonds in their portfolios. The diversification benefit isn’t eliminated, but it is diminished.

This means investors might want to consider assets that provide inflation protection or diversification. Two such examples are commodities and TIPS (Treasury Inflation-Protected Securities). Both of those have historically outperformed during periods of higher inflation. They could potentially help investors better weather an inflationary backdrop that looks different from recent pre-pandemic history.

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