The Unassuming Economist

From a paper by Chandan Sethi, and Bibhuti Ranjan Mishra:

“This paper examines whether inflation targeting (IT) policies improve the macroeconomic performance of 28 Asian economies from 1998 to 2023. Specifically, it assesses the impact of IT on inflation, GDP growth, exchange rates and unemployment. The study employs two econometric methods: propensity score matching (PSM) and panel-corrected standard errors (PCSE). The findings suggest that adopting an IT regime can significantly reduce inflation and exchange rate volatility. However, IT has no significant effect on GDP growth. In contrast, results reveal a positive, statistically significant impact on unemployment, suggesting potential short-run labour-market trade-offs associated with disinflationary policies. These findings contribute to the ongoing debate on the effectiveness of IT by highlighting that its impact on real economic variables may vary across estimation approaches and underlying assumptions.”

From a paper by Jan Čapek | Jakub Chalmovianský | Vlastimil Reichel:

“This study systematically evaluates forecasting performance of 11 Dynamic Stochastic General Equilibrium (DSGE) and 2 Bayesian Vector Autoregression (BVAR) models during recessions and expansions in the US and the euro area. Results show that no single model dominates: parsimonious models perform well in stable periods and at short horizons, while richer DSGE specifications with financial frictions, flexible inflation targeting, or labor market dynamics improve forecasts during recessions. BVARs excel in interest rate forecasting, especially in expansions. Crisis‐specific extensions, such as COVID‐related shocks, yield temporary gains. Forecast accuracy depends on the economic state, variable, horizon, and evaluation metric, underscoring the need for a diversified, context‐dependent modeling toolkit.”

From a paper by Davide Furceri, Georgios Karras, and Khatereh Yarveisi:

“We use the World Uncertainty Index (WUI) to estimate the dynamic effects of uncertainty on the current account balance for a large sample of 143 developed and developing countries, during the period 1973–2021. Our analysis shows that higher uncertainty is associated with an increase in the current account balance which reflects both increased saving and reduced investment. These effects are sizable and statistically significant, peaking one year after the uncertainty shock, and gradually dying out in the long run. The effect varies across countries, being larger in countries characterized by lower social expenditure, less developed financial markets, and during periods of high financial stress.”

From a paper by Luis I. Jacome, Nicolas E. Magud, Samuel Pienknagura, and Martın Uribe:

“We explore the historical link between populist regimes, fiscal monetization, and inflation, and how these links affect monetary policy in the 21st century. Using data for a large set of advanced economies and emerging markets since 1960, we show that, historically, left-leaning populist regimes are linked to increases in central bank lending to the central government, a gauge of deficit monetization. In turn, central bank lending is associated with marked increases in inflation. We show that past exposure to populism that relied on deficit monetization affects the conduct of monetary policy today. Countries with a history of deficit monetization and left-wing populist regimes systematically respond more strongly to deviations of inflation expectations from target. This effect persists even after controlling for the direct effect of past inflation on monetary policy rules. In the context of the literature of experienced learning, this novel finding sheds light on the persistence of past populist policies—central banks operating under the shadow of past populist regimes that relied on inflation-prone deficit monetization continue today needing to send stronger signals of their independence and commitment to price stability to effectively anchor inflation expectations.”

From a paper by Michael D. Bauer, Diego R. Känzig, and Glenn D. Rudebusch:

“Putting a price on carbon emissions helps mitigate climate change but may also raise overall price
inflation. Using high-frequency event studies based on regulatory news in the European carbon market,
we show that carbon price surprises generate significant increases not only in energy futures prices,
but also in inflation swap prices and breakeven inflation rates. These measures of market-based
inflation expectations respond positively at both short and long horizons, with significant effects up to
ten years out. Such long-lived inflationary consequences of climate policy are relevant for central
banks. However, despite the sustained increases in market-based inflation expectations, forwardlooking
nominal interest rates show no meaningful response to the carbon policy shocks, suggesting
that investors do not anticipate that the European Central Bank will lean against the inflationary effects
of higher carbon prices.”