Can the facts of UK inflation persistence be explained by nominal rigidity?

Meenagh, David; Minford, Patrick; Nowell, Eric; Sofat, Prakriti; Srinivasan, Naveen

doi:10.1016/j.econmod.2009.03.004

Cited by 14 publications

(12 citation statements)

References 40 publications

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“…The period following WWII has been characterised in many countries by high persistence (Miles et al, 2017). Theorists have followed two main approaches to explain this stylised fact (Meenagh et al, 2009). In New Keynesian DSGE models (e.g., Christiano et al, 2005) persistence is directly related to the specification of the Phillips curve and is not affected by changes in monetary regime.…”

Section: Literature Reviewmentioning

confidence: 99%

On the Persistence of UK Inflation: A Long-Range Dependence Approach

2018

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This paper examines the degree of persistence in UK inflation by applying long-memory methods to historical data that span the period from 1660 to 2016. Specifically, we use both parametric and non-parametric fractional integration techniques, that are more general than those based on the classical I(0) vs. I(1) dichotomy. Further, we carry out break tests to detect any shifts in the degree of persistence, and also run rolling-window and recursive regressions to investigate its evolution over time. On the whole, the evidence suggests that the degree of persistence of UK inflation has been relatively stable following the Bretton Woods period, despite the adoption of different monetary regimes. The estimation of an unobserved-components stochastic volatility model sheds further light on the issues of interest by showing that post-Bretton Woods changes in UK inflation are attributable to a fall in the volatility of permanent shocks.

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Section: Literature Reviewmentioning

confidence: 99%

On the Persistence of UK Inflation: A Long-Range Dependence Approach

2018

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“…This constraint captures the relevant market practice in financial institutions whereby risk taking is limited not only by the overall size of position, but also by the risk-bearing capacities. 2 Meenagh et al (2009) argued that the degree of nominal rigidities varies with changes in monetary regime. To avoid the issue of structure breaks, we choose a flexible price model rather than the model with nominal rigidities as an appropriate backdrop and focus on the real term behaviours of the economy.…”

Section: The Modelmentioning

confidence: 99%

“…When the net foreign debt grows, macroprudential measures raise the cost of financial intermediation, these costs are then passed onto domestic borrowers in the form of higher borrowing rate. This, in turn, reduces the capital inflow during boom periods, driving down the demand for domestic currency (real exchange rate depreciation) and lowering trade deficits 21 .…”

Section: Implications Of the Model For Optimal Policy Rulesmentioning

confidence: 99%

How important are the international financial market imperfections for the foreign exchange rate dynamics: A study of the sterling exchange rate

Dong

Meenagh

Minford

2019

Journal of International Money and Finance

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The UK has been a net debtor over the past two decades and the sterling exchange rates are sensitive to any chaos that might occur in the financial market. This paper examines the importance of the international financial imperfections in the sterling exchange rate dynamics. We build a small open economy DSGE model with the constrained international financial institutions that intermediate capital flows, and derive tractable analytical solutions. The constraint works to introduce a wedge between lending and borrowing rates, which compensates financiers for their currency risk-taking. The model has been estimated by using a simulation-based Indirect Inference approach, which provides a natural framework for testing the hypothesis implied by the model. We find that the model cannot be rejected by the UK data. Shocks to financial forces are the main driving forces behind the large and sudden depreciation of the Sterling exchange rates in the aftermath of the collapse of Lehman Brothers and the Brexit vote. Furthermore, the optimal policy rules have been proposed.

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“…where the inclusion of lagged inflation captures the inflation persistence that is unexplained in [2]. Ireland (2007) and Meenagh, Minford, Nowell, Sofat and Srinivasan (2009) show persistence in inflation in the United States (US) and UK respectively.…”

Section: Research Backgroundmentioning

confidence: 99%

A New Structural Analysis of Inflation and Economic Activity

Gao¹,

Zhu²

2019

IJoES

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We theoretically investigate the role of expectations in modelling economic activity and the evolution of inflation rates. The New Keynesian Phillips-IS model is extended in our study by having two types of firms with a fraction of firms that uses 'limited' information to develop their expectations. The remaining firms, which are referred to as forward-looking, would use all information available to set prices and make manufacturing budgets. Then we use UK data to examine the robustness of our extension. To estimate our augmented model, we employ the Uhlig (2005) priori restrictions and the Nakajima (2011a) time-varying parameter regression. Our results suggest that the expectations of each type of firms play an important role in explaining the inflation rate and real economic growth in the UK.

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Can the facts of UK inflation persistence be explained by nominal rigidity?

Cited by 14 publications

References 40 publications

On the Persistence of UK Inflation: A Long-Range Dependence Approach

On the Persistence of UK Inflation: A Long-Range Dependence Approach

How important are the international financial market imperfections for the foreign exchange rate dynamics: A study of the sterling exchange rate

A New Structural Analysis of Inflation and Economic Activity

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