The Unassuming Economist

From a paper by Umberto Collodel and Vanessa Kunzmann:

“This paper investigates the transmission of monetary policy to financial markets within the Euro area, focusing on the role of uncertainty. While previous research has extensively examined the effects of changes in expected policy rates through event studies of European Central Banks (ECB) announcements, the impact of second moments and uncertainty has been far less explored. We address this gap by introducing a novel market-based measure of uncertainty regarding future interest rates, calculated as the difference in the standard deviation of Overnight Index Swap (OIS) rates in a three-day window around ECB policy announcements. Our findings reveal that ECB announcements generally increase market uncertainty about future interest rates, regardless of the sign of the policy surprise. This increased uncertainty significantly impacts asset prices, leading to higher nominal yields, lower stock market returns, and Euro appreciation against safe-haven currencies.”

From a paper by Puneet Vatsa:

“I use a structural vector autoregression model to analyse the links between oil prices, petrol prices, inflation, inflation perceptions, and inflation expectations in New Zealand. Findings reveal that although inflation expectations are sensitive to shocks to oil prices, petrol prices, and inflation itself, they are considerably more sensitive to inflation perception shocks. Shocks to inflation perceptions explain 54% of the forecast error variance in inflation expectations after one quarter and 37% after 18 months. The results underscore the importance of including inflation perceptions in models seeking to account for inflation expectations and their associations with energy prices.”

From a paper by Emrehan Aktuğ and Abolfazl Rezghi:

“Using a large cross-country dataset covering over 150 countries and more than 10
macroeconomic variables, this study examines the consistency of IMF World Economic Outlook (WEO)
forecasts with the full information rational expectations (FIRE) hypothesis. Similar to Consensus Economics
forecasts, WEO forecasts exhibit an overreaction to news. Our analysis reveals that this overreaction is
asymmetric, with more measured response to bad news, bringing forecasts closer to the FIRE benchmark.
Moreover, forecasts align more closely with FIRE hypothesis during economic downturns or when a country is part of an IMF program. Overreaction becomes more pronounced for macroeconomic variables with low persistence and for forecasts over longer horizons, consistent with recent theoretical models. We also develop a model to explain how state-dependent nature of attentiveness may drive this asymmetric overreaction.”

From a paper by Haibo Li, Jiayin Sun, and Ningxin Qiu:

“Previous research shows that the impacts of inflation expectations on consumer behaviour are mixed. Using a survey of 2,500 Chinese households, this letter finds that rising inflation expectations increase the purchase intention of durable goods, such as housing and cars, while reducing the demand for easily substitutable goods, such as mobile phones. The effect exhibits significant heterogeneity across income and age groups: higher-income and younger consumers are more inclined to increase investment-oriented spending, while lower-income and older groups adopt more cautious consumption behaviours. These findings also highlight the heterogeneous effects of inflation expectations on consumer welfare across demographic characteristics.”

From a paper by Antoine Gaudin, Brendan Harnoys Vannier, and Martin Kessler:

“In this article, we construct a new database on 606 Debt Sustainability Assessments (DSAs) published for 68 Low Income Countries over 2013–2023, a period covering the last two methodology updates. We study associated forecast errors to account for IMF and WB biases given their central role in the perception of countries‘ performances. The recent methodological change does not display improvement in projection accuracy. DSAs display a tendency for optimism when projecting public and publicly guaranteed debt ratios (realized ratios are higher than projected). DSAs perform relatively better for Small Islands Developing States. Circumstantial determinants (IMF programmes or recession) deepen optimism biases.”