An Empirical Investigation of UIP and PPP in Inflation Targeting Countries

This thesis consists of three empirical chapters, which study the role of central bank credibility in influencing the exchange rate parities in inflation targeting countries. Central bank credibility is considered to be of upmost importance to the success of the inflation targeting regime. The increasing popularity of inflation targeting as a monetary policy framework requires an evaluation of its wider implications on the economy compared to alternative monetary regimes. This thesis provides insight into the relation between central bank credibility and the exchange rate parities in a comparative study of inflation targeting countries and countries that operate alternative monetary regimes. The first empirical chapter investigates the extent to which deviations from the Taylor rule influence the exchange rate parities. The use of a nonlinear framework provides evidence for the strong persistence of deviations from the parities when Taylor rule deviations are large. The findings of the comparative study show that central bank credibility is more important in inflation targeting countries than in nontargeting countries. The second empirical chapter considers the role of interest rate expectations as an often overlooked measure of central bank credibility when investigating the UIP relation. Using a nonlinear framework, the findings are able to confirm the validity of UIP when the public expects the central bank to adopt a tight monetary stance with closer adherence to the inflation target. The final empirical chapter analyses the role of macroeconomic shocks including inflation expectations shocks in a nonlinear model of the real exchange rate. It is shown that the adjustment to PPP is partially influenced by central bank credibility shocks, in particular those arising from survey expectations

Shipping Cost Uncertainty, Endogenous Regime Switching and the Global Drivers of Inflation

The recent Covid-19 pandemic has disrupted global supply chains and led to large increases in shipping costs. This paper first provides shipping cost mean and uncertainty measures by using the endogenous regime switching model with dynamic feedback and interactions developed by Chang et al. (2023). The uncertainty indicator measures overall risk in the shipping market and is shown to represent a useful addition to the existing set of economic and financial uncertainty indices. Both the shipping cost mean and uncertainty measures are then included in structural VAR models for the US, the UK and the euro area to examine the pass-through to headline CPI, core CPI, PPI and import price inflation vis-à-vis other global and domestic shocks. The results suggest that shipping cost uncertainty shocks have sizeable effects on all inflation measures and are characterised by a stronger pass-through than that of other domestic or global shocks. Unlike the latter, they also affect significantly core CPI inflation. These findings imply that shipping cost mean and uncertainty should also be considered by policymakers when assessing the global drivers of inflation

Testing for UIP-Type Relationships: Nonlinearities, Monetary Announcements and Interest Rate Expectations

This paper tests for UIP-type relationships by estimating first a benchmark linear Cointegrated VAR including the nominal exchange rate and the interest rate differential as well as central bank announcements, and then a Smooth Transition Cointegrated VAR (STCVAR) model incorporating nonlinearities and also taking into account the role of interest rate expectations. The analysis is conducted for five inflation targeting countries (the UK, Canada, Australia, New Zealand and Sweden) and three non-targeters (the US, the Euro-Area and Switzerland) using daily data from January 2000 to December 2020. While we cannot confirm the validity of UIP in its strictest theoretical sense, we find evidence for the existence of an equilibrium relationship between the exchange rate and the interest rate differential. Specifically, the nonlinear framework appears to be more appropriate to capture the adjustment towards the long-run equilibrium, since the estimated speed of adjustment is substantially faster and the short-run dynamic linkages more significant. Further, interest rate expectations play an important role: a fast adjustment only occurs when the market expects the interest rate to increase in the near future, namely central banks are perceived as more credible when sticking to their goal of keeping inflation at a low and stable rate. Also, central bank announcements have a more sizeable short-run effect in the nonlinear model. Finally, the equilibrium relationship between the exchange rate and the interest rate differential holds better in inflation targeting countries, where monetary authorities appear to achieve a higher degree of credibility

Exchange Rate Parities and Taylor Rule Deviations

This paper investigates the PPP and UIP conditions by taking into account possible nonlinearities as well as the role of Taylor rule deviations under alternative monetary policy frameworks. The analysis is conducted using monthly data from January 1993 to December 2020 for five inflation-targeting countries (the UK, Canada, Australia, New Zealand and Sweden) and three non-targeting ones (the US, the Euro-Area and Switzerland). Both a benchmark linear VECM and a nonlinear Threshold VECM are estimated; the latter includes Taylor rule deviations as the threshold variable. The results can be summarised as follows. First, the nonlinear specification provides much stronger evidence for the PPP and UIP conditions, the estimated adjustment speed towards equilibrium being twice as fast. Second, Taylor rule deviations play an important role: the adjustment speed is twice as fast when deviations are small and the credibility of the central bank is higher. Third, inflation targeting tends to generate a higher degree of credibility for the monetary authorities thereby reducing deviations of the exchange rate from the PPP- and UIP-implied equilibrium

Functional Shocks to Inflation Expectations and Real Interest Rates and Their Macroeconomic Effects

This paper applies a recently developed method (Inoue and Rossi, 2021) to estimate functional inflation expectations and ex-ante real interest rate shocks, and then examines their macroeconomic effects in the context of a Functional Vector Autoregressive model with exogenous variables (Functional VARX). Monthly data from January 1998 to May 2023 for the US, the UK and the euro area are used for the analysis. The estimated impulse responses show significant effects of the functional shocks on both inflation and output. In addition, threshold functional local projections indicate that the effects are nonlinear and depend on central bank credibility. Further, inflation expectations shocks have similar effects to supply (demand) ones when they are driven by long-term (short-term) changes. In the presence of an inverted (steepening) real interest rate term structure, the effects are inflationary (deflationary) and expansionary (recessionary). Finally, the responses of inflation, output and the policy rate are driven primarily by the slope and curvature factors of the term structure shocks, which contain important information not captured by traditional scalar shocks

SiO excitation from dense shocks in the earliest stages of massive star formation

Molecular outflows are a direct consequence of accretion, and therefore they represent one of the best tracers of accretion processes in the still poorly understood early phases of high-mass star formation. Previous studies suggested that the SiO abundance decreases with the evolution of a massive young stellar object probably because of a decay of jet activity, as witnessed in low-mass star-forming regions. We investigate the SiO excitation conditions and its abundance in outflows from a sample of massive young stellar objects through observations of the SiO(8-7) and CO(4-3) lines with the APEX telescope. Through a non-LTE analysis, we find that the excitation conditions of SiO increase with the velocity of the emitting gas. We also compute the SiO abundance through the SiO and CO integrated intensities at high velocities. For the sources in our sample we find no significant variation of the SiO abundance with evolution for a bolometric luminosity-to-mass ratio of between 4 and 50 $L_\odot/M_\odot$. We also find a weak increase of the SiO(8-7) luminosity with the bolometric luminosity-to-mass ratio. We speculate that this might be explained with an increase of density in the gas traced by SiO. We find that the densities constrained by the SiO observations require the use of shock models that include grain-grain processing. For the first time, such models are compared and found to be compatible with SiO observations. A pre-shock density of $10^5\,$cm$^{-3}$ is globally inferred from these comparisons. Shocks with a velocity higher than 25 km s$^{-1}$ are invoked for the objects in our sample where the SiO is observed with a corresponding velocity dispersion. Our comparison of shock models with observations suggests that sputtering of silicon-bearing material (corresponding to less than 10% of the total silicon abundance) from the grain mantles is occurring.Comment: Accepted for publication by A&

Glycolaldehyde in Perseus young solar analogs

Aims: In this paper we focus on the occurrence of glycolaldehyde (HCOCH2OH) in young solar analogs by performing the first homogeneous and unbiased study of this molecule in the Class 0 protostars of the nearby Perseus star forming region. Methods: We obtained sub-arcsec angular resolution maps at 1.3mm and 1.4mm of glycolaldehyde emission lines using the IRAM Plateau de Bure (PdB) interferometer in the framework of the CALYPSO IRAM large program. Results: Glycolaldehyde has been detected towards 3 Class 0 and 1 Class I protostars out of the 13 continuum sources targeted in Perseus: NGC1333-IRAS2A1, NGC1333-IRAS4A2, NGC1333-IRAS4B1, and SVS13-A. The NGC1333 star forming region looks particularly glycolaldehyde rich, with a rate of occurrence up to 60%. The glycolaldehyde spatial distribution overlaps with the continuum one, tracing the inner 100 au around the protostar. A large number of lines (up to 18), with upper-level energies Eu from 37 K up to 375 K has been detected. We derived column densities > 10^15 cm^-2 and rotational temperatures Trot between 115 K and 236 K, imaging for the first time hot-corinos around NGC1333-IRAS4B1 and SVS13-A. Conclusions: In multiple systems glycolaldehyde emission is detected only in one component. The case of the SVS13-A+B and IRAS4-A1+A2 systems support that the detection of glycolaldehyde (at least in the present Perseus sample) indicates older protostars (i.e. SVS13-A and IRAS4-A2), evolved enough to develop the hot-corino region (i.e. 100 K in the inner 100 au). However, only two systems do not allow us to firmly conclude whether the primary factor leading to the detection of glycolaldehyde emission is the environments hosting the protostars, evolution (e.g. low value of Lsubmm/Lint), or accretion luminosity (high Lint).Comment: A&A, in pres

Shipping cost uncertainty, endogenous regime switching and the global drivers of inflation

JEL classification: C13; E31; E37.The recent Covid-19 pandemic has disrupted global supply chains and led to large increases in shipping costs. This paper first provides shipping cost mean and uncertainty measures by using the endogenous regime switching model with dynamic feedback and interactions developed by Chang et al. (2023). The uncertainty indicator measures overall risk in the shipping market and is shown to represent a useful addition to the existing set of economic and financial uncertainty indices. Both the shipping cost mean and uncertainty measures are then included in structural VAR models for the US, the UK and the euro area to examine the pass-through to headline CPI, core CPI, PPI and import price inflation vis-à-vis other global and domestic shocks. The results suggest that shipping cost uncertainty shocks have sizeable effects on all inflation measures and are characterised by a stronger pass-through than that of other domestic or global shocks. Unlike the latter, they also affect significantly core CPI inflation. These findings imply that shipping cost mean and uncertainty should also be considered by policymakers when assessing the global drivers of inflation

Nonlinearities and asymmetric adjustment to PPP in an exchange rate model with inflation expectations

CESifo Working Paper No. 8921. This version is free to view and download for private research and study only at https://www.cesifo.org/en/publikationen/2021/working-paper/nonlinearities-and-asymmetric-adjustment-ppp-exchange-rate-model. Not for re-distribution or re-use. © copyright holder. This article will be published in a revised form in Journal of Economic Studies https://doi.org/10.1108/JES-02-2021-0109.Copyright © 2021, Christina Anderl and Guglielmo Maria Caporale. Purpose: This paper aims to explain real exchange rate fluctuations by means of a model including both standard fundamentals and two alternative measures of inflation expectations for five inflation targeting countries (UK, Canada, Australia, New Zealand, Sweden) over the period January 1993-July 2019. Design/Methodology/Approach: Both a benchmark linear ARDL model and a nonlinear ARDL (NARDL) specification are considered. Findings: The results suggest that the nonlinear framework is more appropriate to capture the behaviour of real exchange rates given the presence of asymmetries both in the long and short run. In particular, the speed of adjustment towards the PPP-implied long-run equilibrium is three times faster in a nonlinear framework, which provides much stronger evidence in support of PPP. Moreover, inflation expectations play an important role, with survey-based ones having a more sizable effect than market-based ones. Originality: The focus on linearities and the estimation of a NARDL model, which is shown to outperform the linear ARDL model both within sample and out of sample, is an important contribution to the existing literature which has rarely applied this type of framework; the choice of an appropriate econometric method also makes the policy implications of the analysis more reliable; in particular, monetary authorities should aim to achieve a high degree of credibility to manage them and thus currency fluctuations effectively; the inflation targeting framework might be especially appropriate for this purpose