The Czech National Bank adopted an inflation targeting approach after the change rate turmoil in 1997. It went about a new strategy that was known only in a few developed countries. Monetary policy is being realized by directly targeting on its final object (price stability). I analyze the developments of consumer price index, inflation expectations, prognosis of inflation and other economic values, because I determine, if the inflation targeting is a correct alternative for monetary policy in case of Czech Republic, Slovakia and United Kingdom. I can tell that changeover on inflation targeting has being guaranteed a stable economic setting with a low measure of inflation, but results confirm that. This is important for our entrance into monetary union.

In the first chapter, I examine an incomplete markets economy in a politico-economic general equilibrium setting in which the median voter chooses the inflation rate. I use an environment where individuals face an uninsurable idiosyncratic labor productivity shock, and money is the only asset. Being an effective tax on savings, inflation acts as a redistribution mechanism transferring resources from the rich to the poor. I show that the median voter chooses a positive inflation rate as the politico-economic equilibrium outcome. In the second chapter, I analyze how forming a monetary union affects consumption and earnings inequalities through monetary policy changes implied by adopting a common currency. I use a two country open-economy, overlapping-generations model with heterogenous individuals to investigate these effects. In the model, inflation tax is the only redistributive tool and consumption and earnings inequalities are decreasing functions of inflation. When forming a monetary union, countries face a trade-off between the undesirable distributional effects of losing their monetary autonomy and benefits from the elimination of trade frictions. Findings suggest that when countries choose to do so, the country with higher initial inflation will definitely experience a fall in its inflation, hence an increase in its inequalities. In the country with lower initial inflation, however, inflation and inequalities might go in either direction depending on the degree of heterogeneity and the trade dependency between the countries. As the inflationary effect of uniting its monetary policy with a high inflation country can dominate the reducing effect of vanished trade frictions on inflation, this country might have an increase in its inflation, and a decrease in its inequalities. Finally, in the third chapter, I compare the indirect measure of inflation expectations derived by Ireland (1996b) to the direct measures obtained from expectations surveys in two case studies: the US and Turkey. Our results show that the inflation bounds calculated for US data are more volatile than survey results, and are too narrow to contain them due to low standard errors in consumption growth series stemming from high persistence. For the Turkish case, on the other hand, out of three different surveys on inflation expectations in Turkey compared with the bounds computed using Turkish data, expectations obtained by the Consumer Tendency Survey fall within these bounds throughout the whole sample period. Moreover we show that, as Fisher's theory suggests, real interest rates are extremely volatile in Turkey and movements in nominal interest rates cannot be directly used as an indicator of changes in inflation expectations. / text

This dissertation presents a new measure of U.S. inflation persistence from the point of view of a professional forecaster. In chapter 2 I explore two different measures that give insight into the views of professional forecasters and link their views with U.S. inflation data. One of these measures, given by the persistence implied by forecast revisions, appears to have similarities with actual inflation persistence over the 1981–2008 sample period. Chapter 3 explores forecast revisions in a more general setting allowing forecasters to have their own views on inflation persistence as well as a unique information set. This chapter builds a measure of perceived inflation persistence via the implied autocorrelation function that follows from the estimates obtained using a forecaster-specific state-space model. When compared to the autocorrelation function for actual inflation, forecasters tend to react less to shocks that hit inflation than the actual inflation data would suggest. This could be due to increased credibility of the Federal Reserve, but it could also be a result of a bias in the underlying inflation forecasts. Chapter 4 focuses on this issue and finds that the reluctance of forecasters to make revisions to their previously announced forecasts causes their estimates of perceived inflation persistence to be understated as their announced inflation forecasts differ from their true inflation expectations. This chapter also presents a method to undo this bias by retrieving their true inflation expectations series. / Thesis (Ph.D, Economics) -- Queen's University, 2012-12-21 15:39:23.616

In the first chapter, I analyze the US banking industry in order to explain two facts. First, larger banks have lower but less volatile returns on loans compared to smaller banks over the years. Second, larger borrowers have better financial records, i.e. verifiable "hard" information, and they are more likely to match with larger banks, as documented by Berger et al.(2005). I show that these two facts can be explained using a segmented loan markets model with loan contracts between banks and borrowers. Moreover, I show that the difference between the banks returns is not due to diversification advantage of larger banks. Instead, it is because of the fact that larger banks can operate in both large and small loan markets, whereas small banks can only operate in small loans market. Therefore large banks are able to match with larger and less risky borrowers more frequently, which are less likely to default. Moreover, I take the model to infinite horizon allowing bank size to be endogenous to answer multiple policy questions about the future of small business finance and consolidation. I use the data set from the Consolidated Reports of Condition and Income provided by FDIC for 1984-2010 to motivate our research question and to estimate the model. My second chapter revisits the welfare cost of anticipated inflation in an incomplete markets environment where agents can substitute time for money by increasing their shopping frequency. Shopping activity provides an insurance channel to individuals against changes in the return on nominal balances through inflation as documented by Aguiar and Hurst (2007) and McKenzie and Schargrodsky (2011). In my model economy, a higher level of inflation affects people through two channels. First, it distorts the portfolio decision between real and nominal balances, second it redistributes wealth from those who hold more money to those who hold less. People, on average, respond to a higher level of inflation by increasing their price search activity, as they relative return on nominal balances goes down. I find that a 5 percent increase in inflation causes the welfare level go down by 2 percent if people are allowed to substitute time for money, and by 10 percent if we take this channel away from the model. Finally, in the third chapter, I compare the indirect measure of inflation expectations derived by Ireland (1996b) to the direct measures obtained from expectations surveys in multiple countries. Our results show that the inflation bounds calculated for US and UK data are more volatile than survey results, and are too narrow to contain them due to low standard errors in consumption growth series stemming from high persistence. For Chilean and Turkish cases, however, computed bound for inflation expectations seems to fit the survey results better. Out of three different surveys on inflation expectations in Turkey compared with the bounds computed using Turkish data, expectations obtained by the Consumer Tendency Survey fall within these bounds throughout the whole sample period. The success in the Turkish and Chilean cases can be attributed to the fact that volatility in the consumption series, whereas the failure in US and UK cases are most probably stemming from the fact that the current theoretical model is missing a risk-premium component. / text

I study to what extent consumers’ expectations of inflation are formed differently in the short run for countries that belong to a monetary union, which implies a common inflation-targeting central bank, in contrast to countries with national inflationtar geting central banks. I measure if there are differences in consumers’ reaction s to inflation deviation from target, persistency of expected inflation and the ability to predict accurate inflation in the respective considered countries. I also measure average deviation and average absolute deviation of actual and expected inflation from the inflation target. The results suggest that the respective country’s average reaction to inflation deviation from target, degree of persistent expectation and the ability to predict accurate inflation rates are in the same range as well as the results for the average and average absolute deviations. Therefore, I conclude that there are no substantial differences in the formation of consumers’ expectations in countries belonging to a monetary union and countries with national inflation-targeting central banks, in the short run.

O objetivo principal deste trabalho é estudar empiricamente o processo de formação de expectativas inflacionárias no Brasil, no período recente (pós metas de inflação), através de um modelo conexionista, que aproxima a forma como os agentes fazem previsões. A coordenação das expectativas do mercado em relação à inflação futura é um aspecto crucial do regime de metas de inflação. Dessa forma, entender os fatores que afetam tais expectativas é de grande relevância para o direcionamento adequado da política monetária. Os dados para expectativas de inflação utilizados são provenientes da pesquisa FOCUS do Banco Central do Brasil, e constituem um painel de dados não balanceado. Os resultados obtidos nos permitem afirmar que a maior influência sobre as expectativas inflacionárias no período como um todo foi da volatilidade cambial, seguida pela variação no preço das commodities, pela defasagem de ordem um das expectativas, pela variação cambial e pela meta. Em menor magnitude, afetam as expectativas o resultado primário do governo, a defasagem de ordem dois e a taxa Selic. O comportamento desse efeito ao longo do tempo foi verificado através da análise de sensibilidade do produto da rede em resposta a cada uma das variáveis. No período de crise de confiança, há um expressivo descolamento das expectativas em relação à meta, com um aumento do efeito das demais variáveis. Resultado inverso ocorre no período pós-crise: o efeito da meta de inflação aumenta e das demais variáveis tende a se reduzir, ainda que em alguns casos tais efeitos sejam expressivos (como da defasagem de ordem um e da volatilidade cambial). Isso nos leva a concluir que o Banco Central vem consolidando sua credibilidade ao longo do tempo, mas que há ainda espaço para melhorias. / This work aims to empirically study the formation process of inflationary expectations in Brazil, in the recent period (after the introduction of the inflation targeting policy) by a connexionist model that approaches the way agents forecast. The coordination of market expectations in relation to the future inflation is a crucial aspect of the inflation targeting. This way, understanding the factors that affect such expectations has great relevance for the adequate aiming of the monetary policies. The data for inflation expectations used in this work are from the FOCUS research of the Brazilian Central Bank, and it constitutes a unbalanced data panel. The results obtained allow us to affirm that the biggest influence on the inflationary expectations in the period as a whole was from exchange rate volatility, followed by the commodities prices variation, by the first order lag of the expectations, by the exchange rate variation and by the target. In lesser magnitude, the primary result of the government, the second order lag and the Selic tax affect the expectations. The behavior of this effect throughout the time was verified through the analysis of sensitivity of the product of the network in reply to each one of the inputs. In the period of reliable crisis, there is an expressive shift of the expectations in relation to the target, with an increase of the effect of the other variables. Inverse result occurs in the after-crisis period: the effect of the inflation target increases and of the other variables tend to be reduced, despite in some cases such effect are expressive (as the first order lag and exchange rate volatility). Thus we may conclude that the Brazilian Central Bank has been consolidating its credibility throughout the time, but there is still an open space for improvements.

O objetivo principal deste trabalho é estudar empiricamente o processo de formação de expectativas inflacionárias no Brasil, no período recente (pós metas de inflação), através de um modelo conexionista, que aproxima a forma como os agentes fazem previsões. A coordenação das expectativas do mercado em relação à inflação futura é um aspecto crucial do regime de metas de inflação. Dessa forma, entender os fatores que afetam tais expectativas é de grande relevância para o direcionamento adequado da política monetária. Os dados para expectativas de inflação utilizados são provenientes da pesquisa FOCUS do Banco Central do Brasil, e constituem um painel de dados não balanceado. Os resultados obtidos nos permitem afirmar que a maior influência sobre as expectativas inflacionárias no período como um todo foi da volatilidade cambial, seguida pela variação no preço das commodities, pela defasagem de ordem um das expectativas, pela variação cambial e pela meta. Em menor magnitude, afetam as expectativas o resultado primário do governo, a defasagem de ordem dois e a taxa Selic. O comportamento desse efeito ao longo do tempo foi verificado através da análise de sensibilidade do produto da rede em resposta a cada uma das variáveis. No período de crise de confiança, há um expressivo descolamento das expectativas em relação à meta, com um aumento do efeito das demais variáveis. Resultado inverso ocorre no período pós-crise: o efeito da meta de inflação aumenta e das demais variáveis tende a se reduzir, ainda que em alguns casos tais efeitos sejam expressivos (como da defasagem de ordem um e da volatilidade cambial). Isso nos leva a concluir que o Banco Central vem consolidando sua credibilidade ao longo do tempo, mas que há ainda espaço para melhorias. / This work aims to empirically study the formation process of inflationary expectations in Brazil, in the recent period (after the introduction of the inflation targeting policy) by a connexionist model that approaches the way agents forecast. The coordination of market expectations in relation to the future inflation is a crucial aspect of the inflation targeting. This way, understanding the factors that affect such expectations has great relevance for the adequate aiming of the monetary policies. The data for inflation expectations used in this work are from the FOCUS research of the Brazilian Central Bank, and it constitutes a unbalanced data panel. The results obtained allow us to affirm that the biggest influence on the inflationary expectations in the period as a whole was from exchange rate volatility, followed by the commodities prices variation, by the first order lag of the expectations, by the exchange rate variation and by the target. In lesser magnitude, the primary result of the government, the second order lag and the Selic tax affect the expectations. The behavior of this effect throughout the time was verified through the analysis of sensitivity of the product of the network in reply to each one of the inputs. In the period of reliable crisis, there is an expressive shift of the expectations in relation to the target, with an increase of the effect of the other variables. Inverse result occurs in the after-crisis period: the effect of the inflation target increases and of the other variables tend to be reduced, despite in some cases such effect are expressive (as the first order lag and exchange rate volatility). Thus we may conclude that the Brazilian Central Bank has been consolidating its credibility throughout the time, but there is still an open space for improvements.

O objetivo principal deste trabalho é estudar empiricamente o processo de formação de expectativas inflacionárias no Brasil, no período recente (pós metas de inflação), através de um modelo conexionista, que aproxima a forma como os agentes fazem previsões. A coordenação das expectativas do mercado em relação à inflação futura é um aspecto crucial do regime de metas de inflação. Dessa forma, entender os fatores que afetam tais expectativas é de grande relevância para o direcionamento adequado da política monetária. Os dados para expectativas de inflação utilizados são provenientes da pesquisa FOCUS do Banco Central do Brasil, e constituem um painel de dados não balanceado. Os resultados obtidos nos permitem afirmar que a maior influência sobre as expectativas inflacionárias no período como um todo foi da volatilidade cambial, seguida pela variação no preço das commodities, pela defasagem de ordem um das expectativas, pela variação cambial e pela meta. Em menor magnitude, afetam as expectativas o resultado primário do governo, a defasagem de ordem dois e a taxa Selic. O comportamento desse efeito ao longo do tempo foi verificado através da análise de sensibilidade do produto da rede em resposta a cada uma das variáveis. No período de crise de confiança, há um expressivo descolamento das expectativas em relação à meta, com um aumento do efeito das demais variáveis. Resultado inverso ocorre no período pós-crise: o efeito da meta de inflação aumenta e das demais variáveis tende a se reduzir, ainda que em alguns casos tais efeitos sejam expressivos (como da defasagem de ordem um e da volatilidade cambial). Isso nos leva a concluir que o Banco Central vem consolidando sua credibilidade ao longo do tempo, mas que há ainda espaço para melhorias. / This work aims to empirically study the formation process of inflationary expectations in Brazil, in the recent period (after the introduction of the inflation targeting policy) by a connexionist model that approaches the way agents forecast. The coordination of market expectations in relation to the future inflation is a crucial aspect of the inflation targeting. This way, understanding the factors that affect such expectations has great relevance for the adequate aiming of the monetary policies. The data for inflation expectations used in this work are from the FOCUS research of the Brazilian Central Bank, and it constitutes a unbalanced data panel. The results obtained allow us to affirm that the biggest influence on the inflationary expectations in the period as a whole was from exchange rate volatility, followed by the commodities prices variation, by the first order lag of the expectations, by the exchange rate variation and by the target. In lesser magnitude, the primary result of the government, the second order lag and the Selic tax affect the expectations. The behavior of this effect throughout the time was verified through the analysis of sensitivity of the product of the network in reply to each one of the inputs. In the period of reliable crisis, there is an expressive shift of the expectations in relation to the target, with an increase of the effect of the other variables. Inverse result occurs in the after-crisis period: the effect of the inflation target increases and of the other variables tend to be reduced, despite in some cases such effect are expressive (as the first order lag and exchange rate volatility). Thus we may conclude that the Brazilian Central Bank has been consolidating its credibility throughout the time, but there is still an open space for improvements.

This paper examines Czech experience with inflation targeting. It tries to assess empirically character of deviations from inflation targets throughout the time. It assess situation also in an international context. Consequently it analyse ability of IT regime to anchor inflation expectations in context of CNB?s forecasting performance. Results imply that although deviations were quite frequent in the Czech Republic, their occurrence has not been a barrier for delivering lower inflation and its lower volatility. Notwithstanding, its volatility remains significantly above the range experienced in the EU and the EMU countries. Regarding the inflation expectations, monetary policy surprises tend to be smaller over time,signalising that IT regime is priced by the markets. Thus, credibility of the CNB, concerning anchoring of inflation expectations, seems to improve after introduction of IT regime. It also indicates that IT regime is a quite appropriate regime for the upcoming period of time, which will be end up by the entry in the EMU.

Inflationsmålets historia sträcker sig drygt 30 år tillbaka i tiden. En förutsägbar centralbank skapar möjligheter för marknadsaktörerna att sätta upp inflationsförväntningar i linje med det uppsatta målet som bidrar till att prisstegringstakten följer den önskade nivån. I dag har en stor majoritet av de mest ekonomiskt utvecklade länderna valt att införa ett inflationsmål som ett riktmärke för landets centralbank att rikta penningpolitiken mot. Samtidigt som inflationsnivåerna har sjunkit har också stora delar av länderna idag låga räntenivåer. Det innebär att centralbankens ammunition kan vara förbrukad ifall inflationen skulle behövas tryckas upp om inflationsnivån är under sitt mål. Syftet är att försöka förklara om inflationsmålet har haft någon betydelse avseende att minska inflationsvariansen samt om det även har haft en påverkan på BNP-gapet. För att undersöka inflationsmålets betydelse har vi undersökt flera ekonomiskt välutvecklade länder från inflationsmålets introduktion fram tills nu. Relevansen och legitimiteten i studien grundas på ett flertal tidigare studier. Studien ger en historisk överblick över inflationsnivån och dess stabilitet för länderna sedan 80-talet. Resultaten visar en stadig nedgång samt stabilisering på inflationen för samtliga länder. Däremot finner vi inga stöd för att det enbart skulle vara inflationsmålets förtjänst. Vi kan inte heller observera någon skillnad för BNP-gapet med eller utan inflationsmål. Även om vi inte kan hitta bevis på skillnader av att ha ett inflationsmål eller inte, så tror vi att det har haft en betydelse för de stabiliseringar som inflationen fått tack vare att aktörer lättare kan anpassa sina förväntningar mot målet. / The inflation target's history stretches back over 30 years. A predictable central bank creates opportunities for the market participants to set inflation expectations in line with what is set to be made at the price increase that follows the desired level. Today, a large majority of the most economically well-developed countries have chosen to introduce an inflation target as a benchmark for the country's central bank to target its monetary policy. At the same time as inflation levels have fallen, large proportion of the countries today also have low interest rates. This means that the central bank's ammunition can’t be used in case a rise of inflation is needed if the level of inflation is below its target. The purpose of the thesis is to explain whether the inflation target has had any significance in reducing the inflation variance and whether it has had an impact on the output-gap. To investigate the significance of the inflation target, we have examined several economically well-developed countries from the introduction of the inflation target until now. The relevance and legitimacy of the study is based on a number of previous studies in the field of inflation targeting. The study provides a historical overview of inflation levels and stability for countries since the 1980s. The results show a steady decline and stabilization of inflation for all countries. We find no support for it being solely the merit of the inflation target. Nor can we observe any difference for the GDP gap with or without inflation targets. Although we cannot find evidence of differences in having an inflation target or not, we believe that it has had an impact on the stabilizations that inflation has gained due to the fact that actors can more easily adjust their expectations to the target.