Frequent episoded of high inflation and real effects

Wojciech Charemza, Svetlana Makarova and Imran Shah

No 5478, EcoMod2013 from EcoMod

Abstract: The paper analyses inflationary real effects in situation where there are frequent episodes of high inflation. It is conjectured with the increase in high inflation, and when differences between the expected and output-neutral inflation become large, output stimulation through inflationary shocks is more effective than otherwise. It is shown that this conjecture 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 anti-inflationary monetary decisions should be undertaken in periods where the expected inflation exceeds output-neutral. Vector autoregressive modelling, asymmetric impulse response analysis, inflationary real effects gauge (IREG) From the set of 45 countries 17 have been selected where there were marked episodes of high inflation. By the episodes of high inflation we mean the cases where 0.75 quantile of annual inflation is equal to at least 7.5%. For these countries IREG’s have been computed and asymmetric impulse responses of output to inflationary shocks evaluated separately for the periods where IREG is positive and negative. For countries selected there is a strong positive correlation between the differences in these cumulative impulse responses and the logarithm of the 0.75th quantile of inflation. In another words, we have shown that, if a country experiences periods of high inflation, it becomes relevant to pay attention to the differences between the expected and output-neutral inflation and make anti-inflationary decision in the periods where this difference is positive. The higher inflation becomes, the stronger is the conclusion above.

Keywords: worldwide; 45 countries; emphasis on Indonesia; Malaysia and Pakistan; Monetary issues; Developing countries (search for similar items in EconPapers)
Date: 2013-06-21
New Economics Papers: this item is included in nep-mac, nep-mon and nep-sea
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