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Seasonal Patterns of Inflation Uncertainty for the
US Economy: An EGARCH Model Results
-- Hakan Berument, Nezir Kose and Afsin Sahin
The purpose of this paper is to assess the seasonal inflation uncertainties for a big open
economy, the US, for the period from January 1947 to April 2008. The paper uses EGARCH model
which includes volatility in the conditional mean equation capturing the short-term and
long-term volatility forecasts and leverage effects. The results indicate that seasonal inflation
uncertainty increases in January, April and September and decreases in May, June, July and August.
© 2010 IUP. All Rights Reserved.
Inflation Expectations and Monetary Policy Rules:
Findings from Indonesian Economy
-- Syurkani Ishak-Kasim and Abdullahi D Ahmed
The main objective of this study is to understand how Bank Indonesia conducts its monetary
policy as part of the implementation of inflation targeting. The paper adopts a modified Taylor
rule for monetary policy decision-making, using public inflation expectations data to complement
the traditional use of output gaps. Based on the empirical estimation with Indonesian data, it
was found that a modified Taylor rule model using public inflation expectations can
replicate reasonably well the current Bank Indonesia policy interest rates. It is also found that a
Taylor rule using more frequent (monthly) data can capture and adjust to unexpected shocks more
quickly and complement the use of quarterly data as in the original model. The paper finds that,
Bank Indonesia has targeted core inflation as its monetary policy objective, and provides evidence
that the use of core inflation can improve the bank's credibility. The findings imply that Bank
Indonesia should consider a rule-based policy approach using public inflation expectations and
core inflation, if it plans to adopt a monetary policy rule in the future.
© 2010 IUP. All Rights Reserved.
Is There a Long-Term Effect
of Inflation Uncertainty on Unemployment?
-- Yaron Zelekha
The unique Israeli capital market, which enables extraction of direct inflation expectations
and unexpected inflation, is a comfortable setting to test Milton Friedman's hypothesis according
to which inflation uncertainty positively affects unemployment in periods of time which vary
from the short-term. The findings of this study are the first to provide significant empirical
support for this hypothesis. The results reflect the medium-term trends and that the transfer
mechanisms through which uncertainty affects unemployment are mainly private consumption and to a
lesser degree private investment. This interpretation is consistent with the accepted theory,
according to which in the very long-term uncertainty is less relevant.
© 2010 IUP. All Rights Reserved.
Governmental Budget Deficits and Interest Rates:
A Post Keynesian Approach to the Ricardian
Equivalence Proposition in Greece
-- Christos F Stournaras
This paper revisits the issue of the Ricardian Equivalence Hypothesis (REH), as since
its reemergence, its theoretically underlying premises have been called into question. Yet,
severe criticism raised by its opponents concerning the efficacy of government actions has
further challenged the need for empirical analysis. In the traditionally Keynesian approach, the
majority of the research work has ignored issues pertinent to cointegration and/or the
stationarity-exogeneity features of the data, thus offering rather vitiated results. In this paper, the
author suggests that as long as a single cointegrating vector exists, the Phillips-Hansen OLS
estimator can be safely adopted, as it is asymptotically equivalent to full-information system methods.
The main result sharply contradicts conventional priors of REH, as budget deficits strongly affect
the pattern of interest rates. However, any unidirectional short-run causality link between
these variables has not been established. Nevertheless, rigorous testing of the model, in terms of
binding restrictions occasionally introduces sensitivity in certain findings. As a policy exercise, the
paper tries to identify the determinants of the long-term interest rates, crucial in this study. The
evidence demonstrates a decisive role for macroeconomic policy in shaping interest rates suggesting
that national, rather than the international factors or the structure of the economy per se, seem
to be more important in explaining interest rates behavior in Greece.
© 2010 IUP. All Rights Reserved.
Exchange Rate Puzzles: A Review
of the Recent Theoretical and Empirical Developments
-- Thabo M Mokoena, Rangan Gupta and Renee van Eyden
This paper presents a comprehensive literature review of the theoretical and
empirical developments that have taken place over the last two decades in an attempt to address the
exchange rate puzzles. Specifically, it discusses the nonlinear and Bayesian econometric
techniques, dynamic general equilibrium models, and the market microstructure approach that have
been designed to address the three exchange rate puzzles, namely, the Purchasing Power Parity
(PPP) puzzle, the exchange rate disconnect puzzle and the exchange rate determination puzzle. The
paper concludes that the exchange rate puzzles are likely to be less puzzling, if researchers decide
to move to nonlinear econometric frameworks and micro-founded general equilibrium models.
© 2010 IUP. All Rights Reserved.
Inflation and Trade Openness:
Empirical Investigation for India
-- Ajit R Joshi and Debashis Acharya
The question whether increased openness on trade account creates a favorable atmosphere for
inflation reduction has been examined in the present study. The empirical results employing quarterly
data over the 21-year period from 1984-85 to 2004-05, indicate that while trade openness has
significantly contributed to the disinflation process, the decline in the world inflation
rate has also been a significant environmental factor for this decline. The
study also finds that the relationship has grown stronger, in terms of
structural break, since 1989, when the trade liberalization started showing macroeconomic effects.
© 2010 IUP. All Rights Reserved.
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