The welfare effects of inflation: a cost-benefit perspective

This paper reviews theory and evidence of the welfare effects of inflation from a costbenefit perspective. Basic models and selected empirical results are discussed. Historically, in assessing the welfare effects of inflation, the distortion of money demand played a prominent role. More recently, interactions of inflation and taxation came into focus. Growth effects of inflation as well as welfare effects of unanticipated inflation and of inflation uncertainty are also addressed. To assess the policy question whether inflation should be reduced or eliminated, the costs of disinflation play a role. Finally, the trade-off between the benefits of reducing inflation and the costs of disinflation is discussed and an overall assessment of the net welfare effects of achieving price stability is provided. --Inflation,price stability,welfare costs and benefits,distortions,money demand,consumption allocation,tax-inflation interaction

Does Benford's law hold in economic research and forecasting?

First and higher order digits in data sets of natural and socio-economic processes often follow a distribution called Benford's law. This phenomenon has been used in many business and scientific applications, especially in fraud detection for financial data. In this paper, we analyse whether Benford's law holds in economic research and forecasting. First, we examine the distribution of leading digits of regression coefficients and standard errors in research papers, published in Empirica and Applied Economics Letters. Second, we analyse forecasts of GDP growth and CPI inflation in Germany, published in Consensus Forecasts. There are two main findings: The relative frequencies of the first and second digits in economic research are broadly consistent with Benford's law. In sharp contrast, the second digits of Consensus Forecasts exhibit a massive excess of zeros and fives, raising doubts on their information content. --Benford's Law,fraud detection,regression coefficients and standard errors,growth and inflation forecasts

Quantifying risk and uncertainty in macroeconomic forecasts

This paper discusses methods to quantify risk and uncertainty in macroeconomic forecasts. Both, parametric and non-parametric procedures are developed. The former are based on a class of asymmetrically weighted normal distributions whereas the latter employ asymmetric bootstrap simulations. Both procedures are closely related. The bootstrap is applied to the structural macroeconometric model of the Bundesbank for Germany. Forecast intervals that integrate judgement on risk and uncertainty are obtained. --Macroeconomic forecasts,stochastic forecast intervals,risk,uncertainty,asymmetrically weighted normal distribution,asymmetric bootstrap

How effective are automatic stabilisers? Theory and empirical results for Germany and other OECD countries

Cyclically induced changes in taxes and government expenditures which tend to stabilise aggregate output are called automatic stabilisers. Using a small macro model, this paper reviews alternative methods of measuring the smoothing power of automatic stabilisers and discusses their relationship to the Ricardian Equivalence Theorem. Based on simulation exercises with the macroeconometric multi-country model of the Deutsche Bundesbank, the empirical part of the paper presents estimates of the smoothing power of automatic stabilisers for Germany and some other OECD countries. The results for Germany suggest that in the first year 15 to 20 per cent of an exogenous demand shock are absorbed by the automatic stabilisers. Similar results are obtained for France, Italy, the Netherlands, UK, Canada and the US. --Fiscal policy,automatic stabilisers,smoothing power,compensation method

Monetary indicators and policy rules in the P-star model

There is a broad consensus among economists that, in the long run, inflation is a monetary phenomenon. However, monetary policy is often analysed using models that have no causal role for monetary aggregates in the propagation of inflationary processes. Moreover, impulses from monetary policy actions are transmitted to inflation through the output gap alone. This paper analyses monetary indicators and monetary policy rules within the framework of a small monetary model, the P-star model. In this model monetary aggregates play an active role in the transmission mechanism of monetary policy actions. Interest rate impulses affect inflation through two channels, the output gap and the liquidity gap. Section 2 of the paper analyses monetary indicators of inflation. Using a long-run money demand function, three monetary indicators are discussed: the monetary overhang, the price gap, and the nominal money gap. The price gap is a comprehensive indicator of inflationary pressure, combining information from the aggregate goods market (output gap) and the money market (liquidity gap). Some implications of using the price gap in Phillipstype equations for the dynamics of inflation are discussed as well. Section 3 analyses the role of the price gap in the monetary transmission process more closely. The P-Star model and a New-Keynesian-Taylor-type model are compared with respect to their stability properties, implied sacrifice ratios and the efficiency of interest rate policy in stabilising inflation and output fluctuations. Section 4 explores a range of monetary policy rules within the P-star model. First, direct inflation targeting, inflation forecast targeting, and optimal inflation targeting are analysed and contrasted with a strategy of price-level targeting, often suggested as an alternative to inflation-based rules. Second, assuming a more general loss function for the central bank, a Taylor rule (focussing on inflation and output), monetary targeting and a two-pillar strategy (focussing on monetary growth and inflation) are analysed. The performance of these rules is investigated under perfect foresight and rational expectations of the central bank. Moreover, these strategies are compared to two benchmarks, a passive rule and a broadly based meta-strategy. Finally, monetary targeting as an intermediate targeting strategy is compared to a Taylor rule when the central bank has an information advantage with respect to monetary growth. -- Unter Ökonomen besteht ein breiter Konsensus dahingehend, dass Inflation auf lange Sicht ein monetäres Phänomen ist. Gleichwohl wird die Geldpolitik häufig im Rahmen von kleinen Modellen analysiert, in denen die Geldmenge in keinem kausalen Zusammenhang zur langfristigen Entwicklung des Preisniveaus steht. Die Transmission geldpolitischer Impulse erfolgt nur über den Auslastungsgrad. In diesem Papier werden monetäre Indikatoren und geldpolitische Regeln im Rahmen eines kleinen monetären Modells analysiert, des P-Stern ? Modells. In diesem Modell spielen monetäre Aggregate eine aktive Rolle im Transmissionsprozess geldpolitischer Impulse. Die Zinspolitik der Notenbank beeinflusst die Inflationsentwicklung über zwei Kanäle, den Auslastungsgrad und den Liquiditätsgrad. Im Abschnitt 2 werden monetäre Indikatoren der Inflationsentwicklung diskutiert. Ausgehend von einer langfristigen Geldnachfragefunktion werden der Geldüberhang, die Preislücke und die nominale Geldlücke verglichen. Die Preislücke ist ein umfassender Inflationsindikator, der den vom Gütermarkt (Auslastungsgrad) und vom Geldmarkt (Liquiditätsgrad) ausgehenden Inflationsdruck zusammenfasst. Ferner werden die Implikationen der Preislücke in Phillips-Beziehungen für die Inflationsdynamik diskutiert. Der Abschnitt 3 befasst sich eingehender mit der Rolle der Preislücke im monetären Transmissionsprozess. Das monetäre P-Stern ? Modell and ein Neu-Keynesianisches Modell des Taylor ? Typs werden im Hinblick auf ihre Stabilitätseigenschaften, die stabilitätspolitische Effizienz der Zinspolitik sowie die Kosten einer Disinflationspolitik verglichen. Der Abschnitt 4 untersucht eine Reihe geldpolitischer Regeln im P-Stern ? Modell. Die direkte Inflationsteuerung, die Inflationsprognosesteuerung sowie die optimale Inflationssteuerung werden untersucht und mit einer Strategie der Preisniveausteuerung verglichen. Ausgehend von einer allgemeineren Zielfunktion für die Notenbank werden ferner eine Taylor ? Regel (Steuerung von Inflation und Output), die Geldmengensteuerung sowie eine Zwei-Säulen-Strategie (Steuerung von Geldmengenwachstum und Inflation) untersucht. Das Abschneiden dieser Regeln wird für den Fall perfekter Voraussicht sowie rationaler Erwartungen seitens der Notenbank analysiert. Außerdem werden diese Strategien mit zwei Benchmark ? Strategien verglichen, einer passiven Regel sowie einer breit angelegten Meta-Strategie. Abschließend wird die Geldmengensteuerung als Zwischenzielstrategie mit einer Taylor-Regel verglichen, wenn die Notenbank einen Informationsvorsprung bezüglich des Geldmengenwachstums besitzt.

How useful is the carry-over effect for short-term economic forecasting?

The carry-over effect is the advance contribution of the old year to growth in the new year. Among practitioners the informative content of the carry-over effect for short-term forecasting is undisputed and is used routinely in economic forecasting. In this paper, the carry-over effect is analysed 'statistically' and it is shown how it reduces the uncertainty of short-term economic forecasts. This is followed by an empirical analysis of the carry-over effect using simple forecast models as well as Bundesbank and Consensus projections. --forecast uncertainty,growth rates,carry-over effect,variance contribution,Chebyshev density

Umstellung der deutschen VGR auf Vorjahrespreisbasis

Das System der Volkswirtschaftlichen Gesamtrechnungen (VGR) in Deutschland wurde im Frühjahr 2005 von der Festpreisbasis auf das Vorjahrespreiskonzept (Kettenindexkonzept) umgestellt. Dadurch werden Substitutionseffekte besser berücksichtigt und die periodische Umbasierung der Zeitreihen entfällt. Volumenreihen für Quartalsdaten werden nunmehr auf der Basis von durchschnittlichen Vorjahrespreisen mit der Annual Overlap (AO) - Methode ermittelt. Die Umstellung hat eine Reihe von Konsequenzen für die Analyse ökonomischer Zusammenhänge. Im Unterschied zur Festpreisbasis lassen sich auf Vorjahrespreisbasis verkettete Volumenreihen nicht mehr einfach addieren. Dies hat Folgen für die Berechnung von Volumenanteilen und Wachstumsbeiträgen. Weitere Komplikationen ergeben sich bei jahresübergreifenden Rechnungen mit verketteten Quartalsdaten sowie bei saisonbereinigten Daten. In dem vorliegenden Papier werden die auftretenden Probleme beim Umgang mit ökonomischen Zeitreihen auf Vorjahrespreisbasis diskutiert. Das Kettenindexkonzept wird erklärt und anhand einer Modellrechnung mit dem Festpreiskonzept verglichen. Die notwendigen Anpassungen bei der Berechnung von Volumenanteilen und Wachstumsbeiträgen werden erläutert. Die Arbeit beleuchtet auch den Zusammenhang des Kettenindexkonzepts zu mikroökonomisch fundierten Indizes. Die Umstellung der vierteljährlichen VGR auf AO - verkettete Quartalsdaten hat auch Konsequenzen für die Modellierung und Simulation von ökonomischen Zusammenhängen in makroökonometrischen Strukturmodellen. Komplikationen treten auch beim Umgang mit kumulierten Volumenreihen, wie reale Vermögens- und Kapitalbeständen, auf. -- In the spring of 2005 the method of calculating the national accounts in Germany was changed from one based on fixed prices to one based on the previous year?s prices with subsequent chaining (chain linking). Volume series for quarterly data are now calculated on the basis of average prices in the previous year using the annual overlap method. In contrast to the fixed-price method, chained volume series based on the previous year?s prices cannot simply be added together. This has an impact on the calculation of real shares and contributions to growth. Further complications arise when calculations involve quarterly data from two consecutive years and when using seasonally adjusted data. The changeover also has profound effects on the use of chained data in structural macro-econometric models.chain aggregation,non-additivity,quarterly data,annual - overlap,econometric modelling

Coin migration within the euro area

This paper analyses how many euro coins outflow from Germany and which composition of coins is to be expected in the long run. To this end, a simple mathematical model is formulated and calibrated for €1 coins. The introduction of the euro coins in 2002 presented a unique opportunity to analyse the cross-border migration and the mixing process of coins in different euro-area countries. Based on research by Stoyan and depending on growth assumptions, the annual outflow of German €1 coins is calculated to lie somewhere between 4% and 5%. In the long run, the ratio of German €1 coins in Germany is likely to converge to around 50%. --Euro coins,coin volumes,mixing process

Eine transaktionsorientierte Geldmenge

Transaction-Oriented Money Supply The definition of money supply is of key importance within the framework of money supply management strategies. In this paper, the emphasis is not on the choice of the money supply components, but on the way in which they are aggregated and weighted. The transaction-oriented money supply with the M3 (TM3) components is a multiplicative aggregate with a constant weighting; it has a sound microeconomic basis and does not presume perfect substitutability of one of the money supply components by another. The weights are the average costs, expressed as a percentage of the transaction, during the forecasting period. As a result, the weights of the non-interest components are greater than in M3, whilst the weights of the term deposits are correspondingly lower. The long-term income elasticity estimated for TM3 correlates with that of M3, whereas the long-term interest elasticity is visibly greater