Research

This paper examines how volatility in inflation expectations affects the level and volatility of the trade balance. Using quarterly survey forecasts for thirty advanced and emerging economies from 1991 to 2019, I identify shocks to inflation expectations volatility from unanticipated movements in the magnitude of inflation forecast surprises. A shock to expectations volatility moves the trade balance toward surplus over the first two years and toward deficit in the years that follow, while also increasing trade balance volatility. This implies an intertemporal reallocation of the trade balance rather than a lasting change. Following the adoption of inflation targeting, trade balance volatility declines by more than a quarter, consistent with a role for monetary policy credibility in stabilizing expectations. To explain these responses, I develop and calibrate a small open-economy New Keynesian model with incomplete asset markets in which inflation expectations can shift independently of fundamentals and the policy rule, and the size of these shifts varies over time. The model reproduces the two-phase trade balance response found in the data and traces it to the policy rate and exchange rate. Measuring the shock in model-generated data exactly as in the data, I find that it raises trade balance volatility because the size of expectation surprises varies over time. Overall, the results indicate that instability in inflation expectations can contribute to trade balance fluctuations, while monetary policy credibility helps dampen these effects.

This study uses a Bayesian time-varying parameter with stochastic volatility (TVP-SV) approach to analyze the behavior of inflation persistence across monetary regimes spanning hundred and fifty years from 1870 to 2020. Using long-term macroeconomic data to estimate a Phillips curve for the UK and the US, we find evidence for large variations in inflation persistence across time. Further leveraging the time-varying estimates of inflation persistence and our measure of regime credibility, we show that credibility can play a crucial role in determining inflation dynamics in an economy. Empirical evidence for both countries indicates that a higher degree of regime credibility leads to lower inflation persistence. Providing narrative evidence to support our econometric findings, we conclude that credible conduct of monetary policy is crucial for achieving and sustaining price stability on a durable basis. 

The Federal Reserve Board adopted Flexible Inflation Targeting in 2012, replaced it with Flexible Average Inflation Targeting in 2020, and returned to Flexible Inflation Targeting in 2025. We develop and analyze two policy rules, Asymmetric Coefficient Inflation Targeting, and Asymmetric Target Inflation Targeting, that extend the Flexible Inflation Targeting rules to be more stimulative when inflation is below the FED’s 2 percent target and still be time consistent. We evaluate monetary policy using the linearized version of the Federal Reserve Board/United States model and analyze Flexible Inflation Targeting, shortfalls, and our proposed rules. Four versions of each rule, determined by non-inertial, inertial, Taylor or Balanced Approach, are evaluated. Economic performance is better with balanced approach rules than with Taylor rules, worse with shortfalls rules than with FIT rules, better with inertial rules than with non-inertial rules, and better with the Asymmetric Coefficient Inflation Targeting and Asymmetric Target Inflation Targeting rules than with Flexible Inflation Targeting rules.

It is not to be doubted that the oil price shocks adversely impact the economy. Enough literature is present in support of this fact but, at the same time, it is equivalently important to determine the changing nature of this relationship. This paper studies the changing behavior of this relation from 1948-2018 and shows that the oil prices are no more as effective in explaining the changes in the output of the economy as it had been before the 1970s. Our results also show the extent to which oil intensity has reduced in effecting the output of the US economy along with explaining the short term and long term impacts of oil shocks. Through variance decomposition analysis, the paper explains the reason for this decline in oil importance in recent time. Various factors like changing technology and political and strategic implications are found to be a few of the many reasons behind this change. 

Many studies have been conducted to examine the existence of Phillips curve for India however; most of the studies have argued that the Phillips curve exists but only in the short run and that too after controlling for supply shocks. It is not only the past values of inflation that are crucial for determining inflation but the forward-looking inflation expectations play an equally important role. However, most of the studies conducted till now have only focused on the quantitative estimates of the inflation expectations. In this context, this paper attempts to estimate a different series of inflation expectations that have been generated by accounting qualitative estimates of expectations along with the quantitative figures. Empirical findings show evidence of the existence of the NKPC for India. The results also indicate a significant role of inflation expectations in affecting inflation, thus providing credibility to monetary policymaking.