George John Bratsiotis

Inflation targeting and inflation persistence

Abstract This paper argues that the adoption of an inflation target reduces the persistence of inflation. We develop the theoretical literature on inflation persistence by introducing a Taylor Rule for monetary policy into a model of persistence and showing that inflation targets reduce inflation persistence. We investigate changes in the time series properties of inflation in seven countries that introduced inflation targets in the late 1980s or early 1990s. We find that the persistence of inflation is greatly reduced or eliminated following the introduction of inflation targets.

CREDIT FRICTIONS, COLLATERAL, AND THE CYCLICAL BEHAVIOR OF THE FINANCE PREMIUM

This paper examines the behavior of the finance premium after technology and monetary shocks in a dynamic stochastic general equilibrium (DSGE) model where borrowers use a fraction of their production (output) as collateral. We show that this simple framework is capable of producing a countercyclical finance premium, while matching the well-documented stylized facts of macro dynamics. A key feature is the endogenous derivation of the default probability from break-even conditions, which results in the loan rate being set as a countercyclical finance premium over the cost of borrowing from the central bank. The latter is shown to provide an accelerator effect through which shocks can amplify the loan spread and the dynamic response of macro variables.

Monetary policy and real wage cyclicality

This article points to the potential role of monetary policy in affecting the degree of real wage cyclicality. We show that the degree and direction of real wage cyclicality is determined by the interaction of (i) the returns to scale in production, (ii) the nature of aggregate shocks and (iii) monetary policy. Given that production technology is fairly constant in the short run, we suggest that variations in the real wage – output covariance depend largely on the combination of the latter two. Identifying well-documented monetary policy phases in six major Organization for Economic Co-operation and Development (OECD) countries and accounting for both aggregate demand and supply shocks, we provide empirical evidence to support our main theoretical claim.

German Macroeconomic Thought and its Effects

We first ask whether there is something different about the macroeconomic thinking that prevails in Germany, which leads the German government to argue for different policies from those which many other policy-makers and economists put forward. We give a qualified positive answer to this question, and then consider the distinctive attitudes held by the German government and/or central bank with respect to the process of monetary integration in Europe and then to the Eurozone crisis. We argue that German opposition to the use of expansionary fiscal policy and of unconventional monetary policy has made a major contribution to the failure to deal appropriately with the Greek crisis or to bring about a strong recovery in the Eurozone.

Liquidity Regulation, Monetary Policy and Welfare

In the aftermath of the Great Recession, when various policies for regulating credit liquidity were introduced, the US Fed and other central banks placed more emphasis on the interest on reserves than the more traditional required reserve ratio. This paper employs a model with endogenous credit risk, a balance sheet channel, a cost channel and bank equity requirements, to examine the macroprudential role of the interest on reserves and the required reserve ratio and compare their welfare implications. Two transmission channels are identified, the deposit rate and the balance sheet channels. The required reserve ratio is shown to have conflicting effects through these two channels mitigating its policy effectiveness as a credit regulation tool. Conversely, with the interest on reserves both these channels complement each other in reducing the output gap, the cost channel and inflation. The results show that as a credit regulation tool the interest on reserves requires lower policy rate intervention and yields superior welfare outcomes to both the required reserve ratio and credit-augmented Taylor rules.

What is the Globalisation of Inflation

This paper studies the globalisation of CPI inflation by analysing core, energy and food components, testing for structural breaks in the relationships between domestic inflation and a corresponding country-specific foreign inflation series at the monthly frequency for OECD countries. The iterative methodology employed separates coefficient and variance breaks, while also taking account of outliers. We find that the overall pattern of globalisation in aggregate inflation is largely driven by convergence of the mean levels of the core component from the early 1990s, compatible with the introduction of inflation targeting in many countries of our sample. There is less evidence of increased synchronisation of short-run movements in core than aggregate inflation, but an increased role for short run foreign energy inflation often contributes to the globalisation effect.