Making the most of high inflation

Abstract

This article examines the relationship between the real effects of inflation and its level in countries with frequent episodes of high inflation. The real effects are computed as asymmetric impulse responses of output to inflation separately in the regimes with different signs of the differences between the expected inflation and the predicted output-neutral inflation. It is found that, with the increase in inflation, such effects increase in the regime with the positive sign, relatively to the effects in the regime with the negative sign. It is also shown that this finding is valid for most countries with high inflation episodes, where inflation is greater than 4.8% for at least 25% of quarterly observations. This leads to a simple policy prescription that, in economies with frequent high inflation episodes, anti-inflationary monetary decisions are least damaging for output if undertaken in the periods when the difference between the expected and output-neutral inflation is negative.

Keywords:

• high inflation
• real effect indicators
• impulse response analysis
• output-active inflation

JEL Classification:

• E31
• E52
• O11

Acknowledgements

This research used the ALICE High Performance Computing Facility at the University of Leicester. We are grateful to anonymous referees of the Applied Economics for their comments and suggestions and to Adriana Agapie and Yuanyuan Wang for their help in collecting the data. We are very grateful to the participants of the Third International Symposium in Computational Economics and Finance (ISCEF), Paris, April 2014, for their comments and suggestions. We are solely responsible for all remaining deficiencies.

Notes

¹ This article was presented at the third ISCEF (Paris, 10–12 April 2014, http://www.iscef.com).

² Strictly speaking, ${\pi }_t^e$ affects output only if it is not equal to ${\pi }_t^n$.

³ We have adopted GAUSS procedures written by Òscar Jordà for computing direct IRs and available at http://www.econ.ucdavis.edu/faculty/jorda/pubs.html and Thierry Roncalli’s procedures for the orthogonal IRs (see Roncalli, 1995). The GAUSS program and procedures are available on request.

⁴ We have applied the GAUSS procedures made by Carrion-i-Silvestre and available at http://people.bu.edu/perron/code.html.

⁵ These results are not reported here but available on request.

⁶ Results for other countries are available on request.

Additional information

Funding

Financial support of the ESRC/ORA project [RES-360-25-0003] Probabilistic Approach to Assessing Macroeconomic Uncertainties is gratefully acknowledged.