A Trendy Approach to UK Inflation Dynamics1

Forbes, Kristin J.; Kirkham, Lewis; Theodoridis, Konstantinos

doi:10.1111/manc.12293

Cited by 5 publications

(2 citation statements)

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“…Even though our inflation data seems to be stationary for the samples under scrutiny in this paper, this variable is known for its strong persistence. For this reason, Cogley and Sbordone (2008) have suggested to introduce trend inflation among the explanatory variables in the NKPC equation (see also Stock and Watson (2007); Nason and Smith (2016); Cecchetti et al (2017); Eusepi and Preston (2018); Forbes et al (2019)). Although very appealing, this extension has the drawback that this extra right hand side variable is not observable, and as such, it is not so convenient to implement.…”

Section: Discussionmentioning

confidence: 99%

Is inflation driven by survey-based, VAR-based or myopic expectations? An empirical assessment from US real-time data

Bec

Kanda

2020

The North American Journal of Economics and Finance

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The relative importance of survey-based, VAR-based or myopic expectations is evaluated in accounting for US inflation dynamics in a New Keynesian Phillips Curve (NKPC) setting. Our contribution is threefold. First, we estimate the NKPC with both final and real-time vintage data in order to control for large revisions in the real GDP data. Second, we distinguish between two different series for VAR-based inflation forecasts-derived by a recursive or rolling-window method-to account for changes in the conduct and transmission mechanisms of US monetary policy after World War II. Third, joint restrictions are tested in the NKPC to assess whether one of the expectational variables is able, on its own, to capture inflation dynamics. On a statistical basis, we find that there is no clear-cut winner between VAR-and surveybased inflation expectations. Most of our estimated NKPC variants conclude that survey inflation expectations tend to have the largest numerical weight. Nevertheless, the difference between VAR-and survey-based expectations' estimated coefficients is not statistically significant. Moreover, myopic expectations do not play any significant role in the majority of the estimated NKPC variants.

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Section: Discussionmentioning

confidence: 99%

Is inflation driven by survey-based, VAR-based or myopic expectations? An empirical assessment from US real-time data

Bec

Kanda

2020

The North American Journal of Economics and Finance

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“…An analysis of long‐term patterns of inflation was developed by Forbes et al., who found that a ‘trendy’ (p. 23) rather than more prescriptive approach was beneficial to understanding the complex factors which have shaped the value of sterling over time. They concluded that given the nature of Britain's comparatively open economy and dependency on imports and monetary flows, international prices and exchange rates have been the dominant factor that explain Britain's inflation dynamics in recent decades.…”

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confidence: 99%

Review of periodical literature for 2021

Gibbs

2022

The Economic History Review

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The impact of economic shocks was an important topic of current debate during 2021 as Britain experienced the COVID-19 lockdown as well as the beginning of rising inflation and energy price increases. These themes were also present in the literature published that year, which addressed the impact of shifts in which terms of trade and policy responses to currency and other economic pressures were dominant features. The context of the renegotiation of Britain's economic relations with other nations and an increasingly diverse society were other common areas of study, incorporating both the influence of European integration on business and consumer taste as well as the impacts of decolonization and Commonwealth immigration.An analysis of long-term patterns of inflation was developed by Forbes et al., who found that a 'trendy' (p. 23) rather than more prescriptive approach was beneficial to understanding the complex factors which have shaped the value of sterling over time. They concluded that given the nature of Britain's comparatively open economy and dependency on imports and monetary flows, international prices and exchange rates have been the dominant factor that explain Britain's inflation dynamics in recent decades. Bahmani-Oskooee and Karamelikli's research on bilateral trading relationships between Britain and eurozone economies found that exchange rate fluctuations had divergent effects on the trade balance. Nevertheless, sterling depreciation was broadly negative for the UK's position. In a paper published in the Scottish Journal of Political Economy, Bahmani-Oskooee et al. concluded that between 1996 and 2018, short-run exchange rate effects in terms of dollar-pound volatility had an observable impact on trade across a large range of industries. These statistical studies were complemented by archival research on shifts in monetary policy. Butkiewicz and Ohlmacher's Economic History Review paper used new evidence from the Nixon White House tapes to better understand responses to the currency crisis that led to the end of the Bretton Woods system. It found British requests for support against the impact of dollar devaluation on sterling impacted discussions and shaped Nixon's choice to impose wageprice controls as part of a distraction from the realities of a devaluation through shifts in the dollar exchange rate. Aliber's paper on the summit Nixon hosted at Camp David in August 1971 indicates that Nixon had hoped to alter exchange rates to favour American exports, but in fact, devaluation only led to an influx of foreign purchases of US securities, contributing to the United States subsequently becoming the world's largest debtor.

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