External shocks and international inflation linkages: a global VAR analysis

Amid the recent commodity price gyrations, policy makers have become increasingly concerned in assessing to what extent oil and food price shocks transmit to the inflationary outlook and the real economy. In this paper, we try to tackle this issue by means of a Global Vector Autoregressive (GVAR) model. We first examine the short-run inflationary effects of oil and food price shocks on a given set of countries. Secondly, we assess the importance of inflation linkages among countries, by dis-entangling the geographical sources of inflationary pressures for each region. Generalized impulse response functions reveal that the direct inflationary effects of oil price shocks affect mostly developed countries while less sizeable effects are observed for emerging economies. Food price increases also have significative inflationary direct effects, but especially for emerging economies. Moreover, significant second-round effects are observed in some countries. Generalized forecast error variance decompositions indicate that considerable linkages through which inflationary pressures spill over exist among regions. In addition, a considerable part of the observed headline inflation rises is attributable to foreign sources for the vast majority of the regions. JEL Classification: C32, E31commodity prices, Global VAR, inflation, oil shock, second-round effects

External shocks and international inflation linkages: a Global Vector Autoregressive analysis

In my dissertation I examine the short-run inflationary effects of 'historical' exogenous shocks, in particular oil and food prices hikes, for a given set of economies under study. Then, I assess the importance of inflation linkages among countries, by disentangling the geographical sources of inflationary pressures for each region. I estimate a Global Vector Autoregressive (GVAR) model containing 22 country-specific VARX* models representing both industrialized and developing economies. Core inflation, headline inflation, nominal short-term interest rate and nominal effective exchange rate are the variables specific of each country, while oil and food prices are the global variables. The analysis is carried on monthly data for the period spanned from January 1999 to December 2007. The dynamical analysis is undertaken using the generalized impulse response approach, that is particularly suited for a multicountry framework such as the GVAR. Generalized impulse response functions reveal that oil price shock inflationary direct effects mostly affect developed regions while lower effects are observed for emerging regions. Food price rises have significative inflationary direct effects, especially for emerging economies. Due to both oil and food prices shocks, no significant second-round effects are observed for US and Euro Area, while the opposite is found for the Baltic countries and the Other Developed European countries. Generalized forecast error variance decompositions indicate that there exist considerable geographical and trade-based linkages among regions through which inflationary pressures are transmitted. In addiction, a considerable part of the observed headline inflation rises is attributable to foreign sources for the vast majority of the regions

Structural transformation, services deepening, and the transmission of monetary policy

Las economías avanzadas están experimentando una transformación estructural de la industria hacia los servicios. Nosotros documentamos que el cambio estructural viene con un proceso de services deepening: a lo largo del tiempo, tanto los servicios como la industria utilizan más y más bienes intermedios del sector servicios. Nosotros argumentamos que la transformación estructural y el services deepening afectan a la transmisión de la política monetaria mediante el aumento de la importancia relativa de los servicios, que tienen precios más rígidos que la industria. En este documento, estudiamos las implicaciones de la reasignación sectorial de Estados Unidos con un modelo neokeynesiano con dos sectores conectados por una matriz de entrada/salida, que varía con el tiempo de forma endógena. El aumento de los servicios disminuye las respuestas de las tasas de inflación agregadas y sectoriales a un choque de política monetaria. Los cambios en las respuestas de las tasas de inflación sectoriales están enteramente determinados por el services deepeningAdvanced economies are undergoing a structural transformation from manufacturing to services. We document that structural change comes with a process of services deepening: over time, both services and manufacturing become more intensive in service inputs. We argue that structural transformation and services deepening affect the transmission of monetary policy by increasing the relative importance of services, which have stickier prices than manufacturing. We study the implications of the U.S. sectoral reallocation with a New Keynesian model with two sectors connected by an input-output matrix, which varies endogenously over time. The rise of services dampens the responses of aggregate and sectoral inflation rates to a monetary policy shock. The changes in the responses of sectoral inflation rates are entirely driven by services deepenin

The global financial cycle and US monetary policy in an interconnected world

We assess the international spillovers of US monetary policy with a large-scale global VAR which models the world economy as a network of interdependent countries. An expansionary US monetary policy shock contributes to the emergence of a Global Financial Cycle, which boosts macroeconomic activity worldwide. We also find that economies with floating exchange rate regimes are not fully insulated from US monetary policy shocks and, even though they appear to be relatively less affected by the shocks, the differences in responses across exchange rate regimes are not statistically significant. The role of US monetary policy in driving these macrofinancial spillovers gets even reinforced by the complex network of interactions across countries, to the extent that network effects roughly double the direct impacts of US monetary policy surprises on international equity prices, capital flows, and global growth. This amplification increases as countries get more globally integrated over time, suggesting that the evolving network is an important driver for the increasing role of US monetary policy in shaping the Global Financial Cycle.Este trabajo analiza los efectos macrofinancieros globales derivados de la política monetaria de Estados Unidos mediante la estimación de un modelo de vector autorregresivo global (GVAR), que presenta la economía mundial como una red de países interdependientes.Un shock expansivo de la política monetaria de Estados Unidos contribuye a la aparición de un ciclo financiero global, que impulsa la actividad económica en todo el mundo. Se destaca que las economías con regímenes de tipo de cambio flexibles no están completamente aisladas de los shocks de política monetaria de Estados Unidos y, aunque parecen estar relativamente menos afectadas, las diferencias en las respuestas entre regímenes de tipos de cambio no son estadísticamente significativas. El papel de la política monetaria de Estados Unidos se ve incluso reforzado por la compleja red de interacciones entre países, en la medida en que los efectos de la red duplican aproximadamente los impactos directos de las sorpresas de la política monetaria en los precios internacionales de las acciones, los flujos de capital y el crecimiento global. Esta amplificación aumenta a medida que los países se integran más a escala global con el tiempo, lo que sugiere que la evolución de la red es determinante para el papel cada vez más relevante de la política monetaria de Estados Unidos en la configuración del ciclo financiero global

Key elements of global inflation

Against the background of large fluctuations in world commodity prices and global growth, combined with ongoing structural changes relating to globalization, this paper examines some of the key factors affecting global inflation. The paper empirically investigates various relative price and structural impacts on global inflation by: estimating a GVAR to examine how oil price shocks feed through to core and headline inflation; calculating the impact of increased imports from low-cost countries on manufacturing import prices; estimating Phillips curves in order to shed light on whether the inflationary process in the OECD countries has changed over time, particularly with respect to the roles of import prices, unit labour costs and the output gap. Overall, the paper finds that there seem to be various significant pressures on global trade prices and labour markets associated with structural factors possibly partly due to globalisation which, in addition to monetary policy, seem to be behind some of the changes in the inflation process over the period examined in this paper.Phillips Curve, inflation, output gap, import prices, unit labour costs, globalisation, monetary policy.

Uncovering the heterogeneous effects of ECB unconventional monetary policies across euro area countries

En este documento se evalúa el efecto de las medidas no convencionales de política monetaria adoptadas recientemente por el BCE por medio de un modelo VAR Global que explota la variación existente entre las variables de las economías que conforman el área del euro y tiene en cuenta de forma explícita las interdependencias entre países. La estimación del modelo muestra que las medidas de política monetaria no convencional tienen efectos positivos sobre la actividad, el crédito, la inflación y el precio de los activos, y producen una depreciación del tipo de cambio. La mayoría de los países miembros se benefician de estas medidas, pero existe un elevado grado de heterogeneidad. Una parte muy significativa de esta heterogeneidad se explica por las interacciones entre las economías del área del euro, recogidas explícitamente en nuestro modelo, que a su vez amplifican sustancialmente los efectos estimados. Si se compara con la política monetaria convencional (expansiva), las medidas de carácter no convencional parecen ser más efectivas en la coyuntura actual para reducir el coste de financiación de las empresas y potenciar el créditoWe assess the effects of the ECB’s recent unconventional monetary policy measures by estimating a global VAR that exploits panel variation among all euro area economies and explicitly takes into account cross-country interdependencies. Unconventional monetary policy measures have beneficial effects on activity, credit, inflation and equity prices, and lead to a depreciation of the exchange rate. Most euro area members benefit from these measures, but with a substantial degree of heterogeneity. Cross-country spillovers account for a sizable fraction of such dispersion, and substantially amplify effects. Countries with less fragile banking systems benefit the most from unconventional monetary policy measures. Compared to expansionary conventional monetary policies, unconventional measures are particularly effective in reducing firms’ financing costs and boosting credi

A spectral EM algorithm for dynamic factor models

Realizamos dos contribuciones complementarias para estimar eficientemente modelos factoriales dinámicos: un algoritmo EM espectral y un procedimiento de inferencia indirecta iterada rapidísimo para modelos ARMA sin pérdida de eficiencia asintótica para cualquier número finito de iteraciones. Aunque nuestros métodos pueden estimar dichos modelos con muchas series sin buenas condiciones iniciales, cerca del óptimo recomendamos cambiar a un algoritmo del gradiente calculando analíticamente los gradientes espectrales usando el principio EM. Empleamos con éxito nuestros procedimientos para construir un índice que captura los movimientos comunes de las tasas de crecimiento del empleo a escala sectorial en Estados Unidos y lo comparamos con índices obtenidos con métodos semiparamétricosWe make two complementary contributions to effi ciently estimate dynamic factor models: a frequency domain EM algorithm and a swift iterated indirect inference procedure for ARMA models with no asymptotic effi ciency loss for any fi nite number of iterations. Although our procedures can estimate such models with many series without good initial values, near the optimum we recommend switching to a gradient method that analytically computes spectral scores using the EM principle. We successfully employ our methods to construct an index that captures the common movements of US sectoral employment growth rates, which we compare to the indices obtained by semiparametric method

The natural interest rate : concept, determinants and implications for monetary policy

Artículo de revistaThis article defines the natural interest rate, analysing the concept and its role in monetary policy conduct. Estimates of the natural interest rate place it at historically low and even negative levels. Demographics and growth, but also the recent financial crisis with weak aggregate demand, deleveraging, etc., are identified as factors related to this decline. Lastly, the article highlights the difficulties that a natural rate of this type may pose to central banks in achieving their objectives, and it discusses potential monetary policy-related solutions, such as QE and changes in the monetary policy objectiv

The rise and fall of the natural interest rate

Documentamos una subida y una caída del tipo de interés natural (r*) para varias economías avanzadas, que comienza a aumentar en la década de los sesenta y alcanza su punto álgido a finales de los años ochenta. Llegamos a esta conclusión después de demostrar que el modelo de Laubach y Williams (2003) no puede estimar r* con precisión cuando la curva IS o la curva de Phillips es plana. En esas situaciones empíricamente relevantes, una especificación de nivel local para la tasa de interés observada es capaz de estimar r* con precisión. Las estimaciones de un modelo ECM de Panel sugieren que el efecto demográfico temporal de los jóvenes baby-boomers explica gran parte de la subida y de la caídaWe document a rise and fall of the natural interest rate (r*) for several advanced economies, which starts increasing in the 1960’s and peaks around the end of the 1980’s. We reach this conclusion after showing that the Laubach and Williams (2003) model cannot estimate r* accurately when either the IS curve or the Phillips curve is flat. In those empirically relevant situations, a local level specification for the observed interest rate can precisely estimate r*. An estimated Panel ECM suggests that the temporary demographic effect of the young baby-boomers mostly accounts for the rise and fal

Do SVARs with sign restrictions not identify unconventional monetary policy shocks?

Diversos estudios empíricos han demostrado, basándose en autorregresiones vectoriales estructurales (SVAR) identificadas mediante restricciones de signo, que las políticas monetarias no convencionales implementadas después del estallido de la crisis financiera global tuvieron efectos macroeconómicos expansivos. En un artículo reciente, Elbourne y Ji (2019) concluyen, por el contrario, que estos estudios no logran identificar verdaderos shocks de política monetaria no convencional en la zona del euro. En este documento mostramos que sus hallazgos son en realidad totalmente coherentes con una identificación exitosa de los shocks de política monetaria no convencional de los estudios anteriores, y que su enfoque no sirve para evaluar estrategias de identificación de modelos SVARA growing empirical literature has shown, based on structural vector autoregressions (SVARs) identified through sign restrictions, that unconventional monetary policies implemented after the outbreak of the Great Financial Crisis (GFC) had expansionary macroeconomic effects. In a recent paper, Elbourne and Ji (2019) conclude that these studies fail to identify true unconventional monetary policy shocks in the euro area. In this note, we show that their findings are actually fully consistent with a successful identification of unconventional monetary policy shocks by the earlier studies and that their approach does not serve the purpose of evaluating identification strategies of SVAR