Svetlana Makarova

Making the most of high inflation

This article examines the relationship between the real effects of inflation and its level in countries with frequent episodes of high inflation. The real effects are computed as asymmetric impulse responses of output to inflation separately in the regimes with different signs of the differences between the expected inflation and the predicted output-neutral inflation. It is found that, with the increase in inflation, such effects increase in the regime with the positive sign, relatively to the effects in the regime with the negative sign. It is also shown that this finding is valid for most countries with high inflation episodes, where inflation is greater than 4.8% for at least 25% of quarterly observations. This leads to a simple policy prescription that, in economies with frequent high inflation episodes, anti-inflationary monetary decisions are least damaging for output if undertaken in the periods when the difference between the expected and output-neutral inflation is negative.

EUROPEAN CENTRAL BANK FOOTPRINTS ON INFLATION FORECAST UNCERTAINTY

The finding of the paper shows the relative effectiveness of the “one size fits all” policy of the European Central Bank. The paper provides strong evidence in favor of this by testing whether the monetary policy effects (footprints) found in inflation uncertainty converge to a common level. These footprints are measured as the fraction of the estimated policy‐induced reduction in this uncertainty. The testing was conducted by applying a bootstrap‐type test in a regression of the rate of growth of these fractions on their initial values, computed for 16 euro area countries. (JEL C33, E52, E58)