Inflation anchoring and growth: The role of credit constraints

Shipping costs and inflation

“…Estimated anchoring of inflation expectation : For a similar reason, inflation of a country with well-anchored inflation expectations (a smaller response of inflation expectations to inflation surprises) is likely to be less affected by changes in global oil prices. We use an estimate for the degree of anchoring of inflation expectations provided by Choi et al (2022) . Their methodology relies on the inverse of the initial response of inflation expectations to inflation surprises using private sector inflation survey data between 1990 and 2014.…”

“…11 Response of domestic prices; interaction with estimated anchoring of inflation expectations. Note: The figures present the impact of one standard deviation increase in shipping costs on measures of domestic price inflation in the baseline sample of 46 economies, where the shipping costs variable has been interacted with a dummy variable indicating bins of data over an estimate for the degree of inflation anchoring from Choi et al (2022) . The dashed purple lines are the impulse response functions (IRF) for countries with anchoring below the median; the solid blue lines are the IRFs for countries with anchoring above the median.…”

“…For Panel A, the solid line is the impulse response function (IRF); the dark shaded region indicates the 90 percent confidence band; the light shaded region indicated the 95 percent confidence band. For Panel B, the shipping costs variable has been interacted with a dummy variable indicating bins of data over an estimate for the degree of inflation anchoring from Choi et al (2022) . The purple line is the IRF for economies with below median anchoring; the blue line is the IRF for economies with above median anchoring; the shaded regions are one standard error bands.…”

Scarring and Corporate Debt

“…Inflation may lead to capital misallocation and to the extent that more financially dependent firms are those that suffer more from capital misallocation, it may have larger negative effects on firms that have higher corporate debt. Moreover, inflation may affect firms' level of investment by increasing price level uncertainty (Choi et al, 2022). To further check the robustness of our results, we include an interaction term between inflation and the corporate debt dummy as a control.…”

“…An additional variable that may affect firms' investment level through high corporate debt is fiscal policy-to the extent that expansionary fiscal policy can reduce the magnitude of recessions. In addition, Aghion et al (2014) and Choi et al (2022) shows that an increase in a country's degree of fiscal counter-cyclicality raises investment, and more so for industries with higher financial dependence. Also, in this case adding this control variable does not change our results (middle-right panel of Figure 6), and we do not find a significant effect of fiscal policy on investment through firms' corporate debt (Figure A2.14, bottom-right panel).…”