The Unassuming Economist

From a paper by Luis I. Jácome, Nicolás E. Magud, Samuel Pienknagura, and Martin Uribe:

“As inflation targeting (IT) turns 35, it has become a key institutional monetary framework by central banks. Yet, this paper shows that stark differences exist among inflation targeting countries in the conduct of monetary policy. Behind such heterogeneity, the legacy of a high inflation history appears as a preponderant factor. We propose a model that diverges from existing IT workhorse models by adding path-dependence (to a forward-looking model) and potentially imperfect central bank credibility. We show that achieving low inflation (hitting the target) requires more aggressive monetary policy, and is costlier from an output point of view, when individuals’ past inflationary experiences shape their inflation expectation formation. In turn, we provide empirical evidence of the need for these two theoretical additions. Countries that experienced a high level of inflation before adopting the IT regime tend to respond more aggressively to deviations of inflation expectations from the central bank’s target. We also point to the existence of a credibility puzzle, whereby the strength of a central bank’s monetary policy response to deviations from the inflation target remains broadly unchanged even as central banks gain credibility over time. Put differently, a country’s inflationary past casts a long and persistent shadow on central banks.”

From a paper by Haryo Kuncoro:

“This paper aims at analyzing the exchange rate misalignment in the inflation-targeting regime. Different from the previous studies, the exchange rate misalignment is based on the purchasing power parity. We use the ASEAN-3, i.e. Indonesia, the Philippines, and Thailand as the case of the inflation-targeting countries. By applying probit and logit models for the monthly data over the period of 2001(1) to 2022(12), we found that central bank intervention is effective to correct exchange rate misalignment in Indonesia and the Philippines, not for Thailand. More specifically, the selling intervention enables to reduce Indonesian Rupiah overvaluation. Similarly, the Philippines Peso undervaluation can be effectively adjusted by the purchasing intervention. The symmetric behavior of purchasing and selling holds for the two countries. These findings suggest that the central banks in the two countries should be careful in managing foreign reserves in relation to their interventions. Without sterilizing them, any purchase/sale of foreign currency could affect the domestic money supply and thereby undermine the credibility of inflation targeting monetary policy. Further research is advisable to differentiate foreign reserves into sterilized and unsterilized states to analyze the exchange rate misalignment so that the currency stabilization will be more effective.”

From a paper by Luca Bettarelli, Davide Furceri, Prakash Loungani, Jonathan D. Ostry and Loredana Pisano:

“In this paper, we first test the validity of the Environmental Kuznets Curve (EKC) hypothesis, using a large sample of approximately 190 advanced and developing countries, over a period of 34 years (1989-2022). We find that (CO 2 ) emissions respond positively to increasing income per capita, up to a turning point of approximately US$25,000. In a departure from the previous literature, we allow the relationship between economic development and emissions to depend on the stringency of environmental regulation.”

From a paper by Davide Furceri, Swarnali A. Hannan, Jonathan D. Ostry, and Andrew K. Rose:

“The empirical evidence on the growth effects of import tariffs is sparse in the literature, notwithstanding strong views held by the public and politicians. Using an annual panel of macroeconomic data for 151 countries over 1963–2014, we find that tariff increases are associated with an economically and statistically sizeable and persistent decline in output growth. Thus, fears that the ongoing trade war may be costly for the world economy in terms of foregone output growth are justified.”

From a paper by Gerald Auten, and David Splinter:

“Auten and Splinter (2024) estimated national income inequality using tax data. This paper extends our estimates to cover the years 2020–2022. During the pandemic, fiscal relief offset all the increase in distribution-wide inequality and most of the increase in top 1% income shares. Once pandemic-era relief ended in 2022, however, after-tax income inequality increased. In addition, this paper incorporates several improved methods and uses recently revised national accounts data. Collectively, these updates have only modest effects on top income shares. Finally, sensitivity tests show a narrow range around our baseline top income shares. Top income shares declined in the late 1960s and increased in the late 1980s and 1990s with little net change. From 1962 to 2019, top 1% after-tax income shares increased only up to one percentage point. Since 2019, both pre-tax and after-tax top 1% shares increased another percentage point.”