Global inflation dynamics

This paper examines the dynamics of various measures of national, regional, and global inflation. The paper calculates the first two common factors for four measures of industrial country inflation rates: total CPI, core CPI, cyclical total CPI, and cyclical core CPI. The paper then demonstrates that the first common factor is sometimes helpful in forecasting national inflation rates. It also shows that the second common factor and the first common factor for cyclical inflation is sometimes helpful in forecasting national CPI inflation rates. Finally, the paper suggests that the commonality of industrial inflation rates reflects the commonality of the determinants of inflation.

The Term Structure of the Forward Premium

Most studies of the efficiency of the foreign exchange market focus on a single maturity -- usually a one month exchange rate. However, one observes that forward contracts of many maturities are simultaneously traded in the foreign exchange market. The hypothesis that the foreign. exchange market uses all available information has implications for the joint behavior of forward exchange rates of various maturities. This paper theoretically and empirically examines these implications. The paper proposes an equilibrium theory of the term structure of the forward premium. By combining the theory of the term structure of (domestic and foreign)interest rates with the hypothesis of interest rate parity, a simple expression relating the six month forward premium to a geometric average of expected future one month forward premiums can be developed. By assuming that the one and six month forward premiums can be expressed as a bivariate stochastic process, one can derive an expression for the expected one month forward premium. The theory will then impose highly non-linear cross equation restrictions on the parameters of the model. Two methods of testing the validity of the restrictions are presented. The results indicate that the data are consistent with the theory for Germany and inconsistent with the theory for Canada.

Expectations and the Forward Exchange Rate

This paper provides an empirical examination of the hypothesis that the forward exchange rate provides an "optimal" forecast of the future spot ex-change rate, for five currencies relative to the dollar. This hypothesis provides a convenient norm for examining the erratic behavior of exchange rates; this erratic behavior represents an efficient market that is quickly incorporating new information into the current exchange rate. This hypothesis is analyzed using two distinct, but related, approaches. The first approach is based on a regression of spot rates on lagged forward rates. When using weekly data and a one month forward exchange rate, ordinary least squares regression analysis of market efficiency is incorrect. Econometric methods are proposed which allow for consistent (though not fully efficient) estimation of the parameters and their standard errors. This paper also presents a new approach for testing exchange market efficiency. This approach is based on a general time series process generating the spot and forward exchange rate. The hypothesis of efficiency implies a set of cross-equation restrictions imposed on the parameters of the time series model. This paper derives these restrictions, proposes a maximum likelihood method of estimating the constrained likelihood function, estimates the model and tests the validity of the restrictions with a likelihood ration statistic.

Economic policy for the information economy : a summary of the Bank's 2001 Economic Symposium

The economies of the industrialized countries are being reshaped by the rapid development and diffusion of advanced information and communications technologies. Access to information is unprecedented, and the ability to process and exchange information has helped businesses increase efficiency and households raise their standards of living. There has been considerable agreement as to the broad features of the emerging information economy. But there has been less consensus on the likely magnitude and significance of the economic effects or on the important policy issues raised by these developments.> The Federal Reserve Bank of Kansas City sponsored a symposium, “Economic Policy for the Information Economy,” at Jackson Hole, Wyoming, on August 30 – September 1, 2001. The symposium brought together a distinguished group of central bankers, academics, and financial market experts to examine how the information economy will alter the structure of economic activity. The symposium also served as a forum for addressing key policy challenges.> Mr. Hakkio summarizes the principal issues raised at the symposium. Participants agreed that the information economy has changed the microeconomic and macroeconomic structure of the U.S. and foreign economies. The general consensus at the symposium was that long-run growth was probably 3 to 3 ½ percent, compared to 2 ¼ to 2 ½ percent in the 1980s and early 1990s.Information technology

The U.S. current account: the other deficit

Considerable attention has been focused recently on the size and persistence of the U.S. budget deficit. Somewhat lost in the headlines is growing concern among many economists and policymakers over "the other deficit"--the U.S. current account deficit. Before 1982, U.S. current account deficits were small and temporary, as imports of goods and services rarely exceeded exports for an extended period. Since 1982, however, this deficit has increased significantly and many analysts expect the deficit to remain high well into the next century.> Large current account deficits pose both a short-term risk and a long-term problem for the United States. At present, the United States depends on a commensurately large flow of foreign capital into U.S. markets to finance the current account deficit. If market sentiment were to shift against the United States, higher interest rates and a lower exchange value of the dollar might be necessary to continue to attract foreign capital. In the long term, because financing a chronic deficit requires the United States to borrow from abroad, future interest payments on this debt could lower the standard of living in the United States.> Hakkio examines the current account deficit and its implications. First, he discusses why the current account deficit became large and persistent in the early 1980s. Second, he analyzes the short-term risk that current account deficits pose for the U.S. economy. Finally, he analyzes the long-term problem associated with a chronic current account deficit.Deficit financing

Advanced Artificial Intelligence Technology Testbed

The Advanced Artificial Intelligence Technology Testbed (AAITT) is a laboratory testbed for the design, analysis, integration, evaluation, and exercising of large-scale, complex, software systems, composed of both knowledge-based and conventional components. The AAITT assists its users in the following ways: configuring various problem-solving application suites; observing and measuring the behavior of these applications and the interactions between their constituent modules; gathering and analyzing statistics about the occurrence of key events; and flexibly and quickly altering the interaction of modules within the applications for further study

PCE and CPI inflation differentials: converting inflation forecasts

The Federal Reserve recently announced it will begin to release quarterly inflation forecasts based on the Personal Consumption Expenditure Price Index. As Chairman Bernanke said, the PCE index is generally thought to be ?the single most comprehensive and theoretically compelling measure of consumer prices.? At the same time, Bernanke said that ?no single measure of inflation is perfect, and the Committee will continue to monitor a range of measures when forming its view about inflation prospects,? including the Consumer Price Index. ; The public and private sectors alike will want to be able to convert CPI inflation forecasts released by various organizations to PCE inflation forecasts, and vice versa. But the inflation differentials for the two measures can change significantly over time. To convert between CPI and PCE inflation projections, economists must construct statistical models to explain and predict the inflation differentials (overall and core), recognizing that the differentials may change over time. ; Hakkio estimates a set of models that analysts can use to make such conversions.Inflation (Finance)