Miroslav Plašil

Inflation and the steeplechase between economic activity variables: evidence for G7 countries

Abstract A sharp increase in unemployment accompanied by a relatively muted response of inflation during the Great Recession and a consecutive inflationless recovery cast further doubts on the very existence of the Phillips curve as a systemic relation between real activity and inflation. With the aid of dynamic model averaging, this paper aims to highlight that this relation resurfaces if (i) inflationary pressures are captured by a richer set of real activity measures, and (ii) one accounts for the existence of a non-linear response of inflation to the driving variable. Based on data for the US and other G7 countries, our results show that the relation between economic activity and inflation is quite sturdy when one allows for more complex assessment of the former. We find that measures of economic activity describe inflation developments to a varying degree across time and space. This can blur the picture of inflation–real economy comovements in models where only a single variable of economic activity is considered. The output gap is often outperformed by unemployment-related variables. Our results also confirm a weakening of the inflation–activity relationship (i.e. a flattening of the Phillips curve) in the last decade that is robust both across activity measures and across countries.

System Priors for Econometric Time Series

The paper introduces “system priors”, their use in Bayesian analysis of econometric time series, and provides a simple and illustrative application. System priors were devised by Andrle and Benes (2013) as a tool to incorporate prior knowledge into an economic model. Unlike priors about individual parameters, system priors offer a simple and efficient way of formulating well-defined and economically-meaningful priors about high-level model properties. The generality of system priors are illustrated using an AR(2) process with a prior that most of its dynamics comes from business-cycle frequencies.

A New Measure of the Financial Cycle: Application to the Czech Republic

The recent financial crisis has demonstrated the importance of the linkages between the financial sector and the real economy. This article proposes a suitable and easy-to-apply method for assessing the position of the economy in the financial cycle in order to identify emerging imbalances in a timely manner. The method utilizes a composite indicator, constructed by the authors, that combines variables representing risk perceptions in the financial sector and their reinforcing interactions over the financial cycle. The indicator is calibrated to capture the future credit losses of the Czech banking sector. This method can be used by policymakers for a wide range of policy decisions, including the setting of a countercyclical capital buffer.