dissertation on inflation

A Study on Inflation

21 Pages Posted: 14 Apr 2021

Kavayitri Bahinabai Chaudhari North Maharashtra University, Jalgaon-425001, India; DSATM

Date Written: March 31, 2021

The report entitled –“A Study on Inflation” elucidates inflation (or less frequently, price inflation) which is a general rise in the price level in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power per unit of money– a loss of real value in the medium of exchange and unit of account within the economy. The opposite of inflation is deflation, a sustained decrease in the general price level of goods and services. The common measure of inflation is the inflation rate, the annualized percentage change in a general price index, usually the consumer price index, over time. Economists believe that very high rates of inflation and hyperinflation are harmful, and are caused by an excessive growth of the money supply. Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth. Inflation affects economies in various positive and negative ways. The negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation were rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future. Positive effects include reducing unemployment due to nominal wage rigidity, allowing the central bank greater freedom in carrying out monetary policy, encouraging loans and investment instead of money hoarding, and avoiding the inefficiencies associated with deflation. Today, most economists favor a low and steady rate of inflation.Low (as opposed to zero or negative) inflation reduces the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduces the risk that a liquidity trap prevents monetary policy from stabilizing the economy. The task of keeping the rate of inflation low and stable is usually given to monetary authorities. Generally, these monetary authorities are the central banks that control monetary policy through the setting of interest rates, through open market operations, and through the setting of banking reserve requirements.

Keywords: devaluation, Consumer Price Index (CPI), Keynesians, monetarists

Suggested Citation: Suggested Citation

Remesh VP (Contact Author)

Kavayitri bahinabai chaudhari north maharashtra university, jalgaon-425001, india ( email ).

9419034720 (Phone)

HOME PAGE: http://https://nmu.ac.in/

DSATM ( email )

8281642955 (Phone)

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Measuring core inflation in the UK

This PhD thesis provides a comprehensive analysis of inflation in the UK, adopting a data-driven approach to model inflation, evaluate different measures of core inflation, and investigate the impact of monetary shocks on output. The study begins by modelling month-on-month (mom) inflation as an autoregressive process, taking into account factors such as seasonality and VAT changes. A significant 12-month lag effect on inflation was identified, leading to a degree of persistence in annual inflation. This effect was found to exist at the aggregate level and within the majority of consumer expenditure categories. The research also explored the individual components of the Consumer Price Index (CPI) basket using the System of National Accounts (SNA) COICOP expenditure divisions up to 4 digits. The study found that inflation is best explained by itself, indicating a focus on core measures of inflation without reference to other variables. In addition to analysing mom inflation, the thesis investigated different methods for measuring core inflation and their effectiveness in predicting future inflation at the 12- month horizon. The exclusion of food and energy prices, the use of trimmed means, and the inclusion of sticky prices were evaluated. The results showed that the exclusion of food and energy measure and the sticky price index have the best forecasting performance at the 12-month horizon, while the autoregressive and seasonal autoregressive integrated moving average models have the worst performance. In the third chapter, the thesis delves deeper into the intricacies of inflation persistence and the impact of monetary shocks on output. The Generalized Taylor Economy (GTE) model proposed by Dixon and Kara (2005b) was introduced, providing a flexible framework for capturing the heterogeneity of wage-setting processes across sectors. The research underscores the significant influence of long-term contracts on economic output and its persistence. Furthermore, the diverse range of contract lengths present in the economy and their potential influence on economic dynamics is significant. Measuring Core Inflation in the UK Abstract Page III Overall, this thesis has made a valuable contribution to the literature on macroeconomic modeling by providing a more comprehensive understanding of inflation persistence, the impact of monetary shocks on output, and the effectiveness of different measures of core inflation in forecasting future inflation. The findings of the study have important implications for policymakers and practitioners who rely on accurate inflation forecasts to make informed decisions.

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Essays on Inflation Volatility

BANERJEE, SHESADRI (2013) Essays on Inflation Volatility. Doctoral thesis, Durham University.

Inflation volatility is one of the key constituents of inflation dynamics and has not received much attention in the literature. The study of inflation volatility is important because it has adverse economic consequences. This thesis aims to study the determinants of inflation volatility for advanced and developing countries. At the outset, I explore the empirical regularities of inflation volatility based on monthly and quarterly CPI inflation data (1968 to 2011) using time and frequency domain analysis. I establish a stylised fact that inflation is significantly more volatile in developing countries than advanced countries. This raises a research question why it is so. Using a New Keynesian paradigm, an answer to this research question is sought from two angles. First, a policy rule for interest rate (known as Taylor rule) is estimated over a balanced panel of advanced and developing countries to examine the difference in policy activism between these two groups of countries. This follows from the New Keynesian argument that an active monetary policy is a necessary condition for stable dynamics of inflation. Using the Generalized Method of Moments and the Arellano and Bover (1995) method of dynamic panel estimation, I find that monetary policy is active in advanced countries but passive in developing economies. This striking difference in the policy regimes between these two groups can be one of the reasons for the difference in inflation volatility. Second, motivated by the asymmetry in consumption basket of CPI between advanced and developing economies, a two-sector New Keynesian model with food and non-food is developed. The model features: i) composite consumption and labour index, ii) differential Calvo-type price adjustment of firms across sectors, and iii) Taylor type monetary policy rule. Characterising the distinct structures of advanced and developing economies by two different parameterizations, the model calibration shows that demand disturbance generated by the preference shock is one of the fundamental forces for inflation volatility. In addition, my simulation analysis demonstrates that other structural parameters such as the frequency of price adjustment, distribution of labour and the elasticity of labour substitution, and the policy parameter of inflation in the Taylor rule are also critical factors explaining the greater volatility of inflation in developing economies.

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