Exchange Rate, Second Round Effects and Inflation Processes (eBook)

Preface 5
Acknowledgements 9
Contents 10
List of Figures 14
List of Tables 25
Part I The Changing Size of Second-Round Effects 27
1 Introduction 28
1.1Heightened Inflation Persistence Matter for Sacrifice Ratios 31
1.2Why Write This Book? 33
1.2.1To Show the Policy Implications of the Time-Varying Exchange Rate Pass-Through 33
1.2.2To Show the Potency of Increased Monetary Policy Credibility in Dampening Inflationary Pressures 34
1.2.3To Show the Potency of the Joint Influence of Monetary Policy and Fiscal Policy Credibility 36
1.2.4To Show That Banking Sector Competition and Concentration Matter for the Interest Rate Pass-Through and Loan Mark-Ups 37
1.2.5To Show the Asymmetric Reaction of Household Consumption, Household Financial Wealth and Lending Rate to Policy Rate Tightening and Loosening Shocks 41
References 42
2 Policy Implications of ERPT and Ongoing Debates 44
2.1Introduction 44
2.2Policy Implications of the Exchange Rate Pass-Through 45
2.3Debates Should Focus on the Following ERPT Aspects 49
2.4Different Methods Used to Estimate the Effects of ERPT 51
References 56
3 How Big Are the Second Round Effects of the Exchange Rate Depreciation Transmitted via Consumer Price Inflation to Average Wage Settlements? 61
3.1Introduction 62
3.2Trend Analysis 65
3.3How Significant Are the Second-Round Effects on Wage Settlements? 66
3.3.1Do Consumer Price Inflation Regimes Matter? 68
3.3.2The Size of the Second-Round Effects Following an Exchange Rate Depreciation Shock Based on Inflation Regimes 70
3.4Conclusion and Policy Implications 71
References 72
4 Does the Size of Second-Round Effects on Growth in Total Remuneration Per Worker Due to Exchange Rate Depreciation Shock Vary According to Inflation Regimes? 73
4.1Introduction 74
4.2Are There Second-Round Effects via the Inflation Expectation Channel? 75
4.2.1What Are the Implications for Monetary Policy? 78
4.3Conclusion and Policy Implications 80
References 81
5 Do Inflation Regimes Influence the Size of Second-Round Effects on Private Sector Wage Inflation Following an Exchange Rate Depreciation Shock? 82
5.1Introduction 83
5.2Are There Second-Round Effects via the Inflation Expectations Channel? 84
5.2.1Does the Six Percent Inflation Threshold Matter for the Size of Second-Round Effects in Private Sector Wage Inflation Due to the Exchange Rate Depreciation Shock? 86
5.2.2What Are the Implications for Monetary Policy When Inflation Expectations Are in the Low Consumer Inflation Regime? 88
5.3Conclusion and Policy Implications 90
References 90
6 Do Inflation Regimes Matter for the Sizes of Second-Round Effects of Oil Price Shocks to Consumer Price Inflation via the Unit Labour Costs Channel? 91
6.1Introduction 92
6.2Do Inflation Regimes Impact Point Estimates of the ULC and Oil Price shocks on Inflation? 94
6.2.1Would the Preceding Findings Differ When Using a Time-Varying VAR Approach? 97
6.2.2Evidence from Inflation Regime Dependent VAR Models 98
6.3Are There Any Second-Round Effects? 99
6.4Conclusions and Policy Implications 102
References 102
Part II Monetary Policy Credibility and Time-Varying Exchange Rate Pass-Through 103
7 Monetary Policy Credibility and the Time-Varying Exchange Rate Pass-Through to Consumer Price Inflation 104
7.1Introduction 105
7.2How Has the Relationship Between the Exchange Rate and Inflation Changed Over Time? 106
7.3Has the Sensitivity of Inflation to the Exchange Rate Depreciation Shocks Weakened? 109
7.4The Time-Varying Exchange Rate Pass-Through to Inflation 110
7.5How Reasonable Is the Time-Varying ERPT? 111
7.6What Is the Impact of Monetary Policy Credibility on the ERPT? 112
7.7Conclusion and Policy Implications 115
References 115
8 Monetary Policy Credibility and the Exchange Rate Pass-Through to Inflation 117
8.1Introduction 118
8.2Monetary Policy Credibility Indicators 120
8.2.1How Reasonable Is the Estimated Monetary Policy Credibility Indicator? 121
8.2.2How Has the Monetary Policy Credibility Indicator Influenced Inflation Dynamics Since 2007? 123
8.3Does Monetary Policy Credibility Impact the Transmission of Exchange Rate Shocks to Inflation? 124
8.3.1Evidence Based on the Regime Dependent VAR Model Approach 125
8.3.1.1 Evidence in the High Inflation Regime 125
8.3.1.2 Evidence in the Low Inflation Regime 126
8.4Evidence from the Inflation Targeting Regime 127
8.5Conclusion and Policy Implications 129
References 129
9 Does the Monetary Policy Channel Impact the Transmission of Exchange Rate Depreciation Shocks to Inflation? 131
9.1Introduction 132
9.2What Can Be Inferred from the Stylised Facts? 133
9.3Does Monetary Policy Impact the ERPT to Inflation? 135
9.4How Does the ERPT Impact the Monetary Policy Response to Positive Inflation Shocks During the Inflation Targeting Regime? 137
9.5Conclusion and Policy Implications 138
References 139
10 Does Monetary Policy Credibility Impact the Responses of Unit Labour Costs to Exchange Rate Depreciation Shocks? 140
10.1Introduction 141
10.2Inflation Regime Dependent Exchange Rate Effects on ULC 142
10.3Inflation Regime Dependent Effect During the Inflation Targeting Period 144
10.4Counterfactual VAR Analysis of Inflation Regimes and the Role of Monetary Policy Credibility Channel 145
10.4.1 Evidence Based on Inflation Regimes 146
10.5Conclusion and Policy Implications 148
References 148
11 Does Monetary Policy Credibility Play a Role in the Transmission of Oil Price Shocks to Inflation Expectations? 149
11.1Introduction 150
11.2Do the Positive Oil Price Shocks Impact Inflation Expectations? 151
11.3Does the Inflation Environment Matter? 151
11.4Does Monetary Policy Credibility Matter for the Response of Inflation Expectations to Positive Oil Price Inflation Shocks? 153
11.5Conclusion and Policy Implications 154
References 155
12 Does Monetary Policy Credibility Affect Market-Based Inflation Expectations? 157
12.1Introduction 158
12.2What Is the Nature of the Association Between the Monetary Policy Credibility Indicator and Inflation Expectations? 160
12.3The Role of the Monetary Policy Credibility Channel in Transmitting R/US$ Depreciation and Positive Oil Price Inflation Shocks to Market-Based Inflation Expectations 162
12.4What Is the Role of Monetary Policy Credibility on Market-Based Inflation Expectations in Different Inflation Regimes? 163
12.5Conclusion and Policy Implications 165
References 165
Part III Trade Openness, Consumer and Business Confidence and the Exchange Rate Pass-Through 167
13 Does the Consumer Confidence Channel Affect the Response of Inflation to Exchange Rate Depreciation Shocks? 168
13.1Introduction 168
13.2What Is the Effect of High Consumer Confidence on the ERPT to Inflation? 172
13.3How Does Weak Consumer Confidence Impact the ERPT to Inflation? 173
13.3.1 Evidence from the Three Variable Model 173
13.3.2 What Is the Role of Monetary Policy Credibility Relative to Consumer and Business Confidence in the ERPT to Inflation? 176
13.4Conclusion and Policy Implications 178
References 179
14 Does Weak Business Confidence Impact the Pass-Through of the Exchange Rate Depreciation Shocks to Inflation? 180
14.1Introduction 181
14.2Does the Business Confidence Channel Impact the Exchange Rate Pass-Through to Inflation? 185
14.3Does the Inflation Threshold Matter for the Role of Business Confidence in the ERPT to Inflation? 186
14.4Robustness Analysis Using Deviations of the Business Confidence Index from Neutral Territory 188
14.5Did Weak Business Confidence Post 2008Q1 Affect the Correlation Between the Exchange Rate Changes, Inflation and the Size of the ERPT? 190
14.6Evidence from the Exchange Rate Pass-Through Channel 192
14.7Conclusion and Policy Implications 193
References 193
15 Does the Exchange Rate Volatility Matter for the Reaction of Consumer Price Inflation to Exchange Rate Depreciation Shock? 194
15.1Introduction 195
15.2Brief Review of the Theoretical Link Between the Exchange Volatility and GDP Growth Dynamics 199
15.3Does the Exchange Rate Volatility Impact GDP Growth and Its Components? 201
15.3.1 The Effects of Positive Exchange Rate Volatility Shocks on the Components of Economic Growth 203
15.3.2 Does the Exchange Volatility Matter for the Output Gap Dynamics? 205
15.3.2.1 Responses of the Output Gap to Exchange Rate Depreciation Shocks and the Role of the Exchange Rate Volatility 207
15.4Does the Exchange Rate Volatility Impact the Size of the Exchange Rate Pass-Through Coefficients? 208
15.4.1 Indirect Role of the Exchange Rate Volatility on the Responses of Consumer Price Inflation to Exchange Rate Depreciation Shock 208
15.4.2Robustness Analysis 209
15.5Conclusion and Policy Implications 211
References 212
16 Does Trade Openness or Globalisation Matter for the Response of Inflation to Exchange Rate Depreciation Shocks? 215
16.1Introduction 215
16.2Theoretical Framework 219
16.3Empirical Results 220
16.4Does the Business Confidence Channel Influence the Effects of Trade Openness Shock on the ERPT? 223
16.5Does the Trade-Openness Channel Impact the Response of Inflation to Exchange Rate Depreciation Shocks? 225
16.6Conclusion and Policy Implications 227
References 228
Part IV Fiscal Policy Credibility and Time-Varying Exchange Rate Pass-Through 231
17 Does Fiscal Policy Credibility Matter for the Exchange Rate Pass-Through to Consumer Price Inflation in South Africa? 232
17.1Introduction 232
17.2The Estimated Fiscal Policy Credibility Indicator 234
17.3Do Fiscal Policy Credibility Shocks Impact Inflation and the Exchange Rate? 235
17.4Does Fiscal Policy Credibility Work via the Inflation Expectations Channel? 237
17.5Does the Fiscal Policy Credibility Channel Amplify Inflation Regimes? 238
17.6Conclusion and Policy Implications 240
References 241
18 Has the Fiscal Policy Credibility Shock Impacted the Time-Varying Exchange Rate Pass-Through to Consumer Price Inflation? 242
18.1Introduction 243
18.2Does Fiscal Policy Credibility Impact the ERPT? 245
18.3Robustness Tests Based on Reverse Ordering 246
18.4What Is the Nature of the Interaction Between Monetary and Fiscal Policy Credibility? 246
18.5Does the Persistence of Fiscal Policy Credibility Shocks Matter for the ERPT? 247
18.6How Did Fiscal Policy Credibility Impact the ERPT Dynamics Since 2007? 248
18.7Does the ERPT Channel Transmit Fiscal Policy Credibility Shocks to Inflation Expectations? 250
18.8Conclusions and Policy Implications 251
References 251
19 Is the Impact of High Monetary Policy Credibility on Consumer Price Inflation and the ERPT Reinforced by Fiscal Policy Credibility? 253
19.1Introduction 254
19.2Do Monetary Policy Credibility Shocks Impact Inflation and the Exchange Rate? 256
19.3Does Monetary Policy Credibility Affect Inflation Expectations? 258
19.4Does Fiscal Policy Credibility Shock Impact Inflation? 259
19.5The Interaction Between Monetary and Fiscal Policy Credibility 260
19.6Did Fiscal Policy Credibility Post 2009 Impact the Transmission of Monetary Policy Credibility Shocks to Inflation? 261
19.7Evidence Based on the Inflation Expectations Channel 262
19.8Conclusion and Policy Implications 263
References 264
Part V Regulated Prices, Inflation Process and the Influence on Monetary Policy 266
20 What Is the Role and Costs of Administered Prices? Evidence from Monetary Policy Responses to Positive Inflation Shocks 267
20.1Introduction 268
20.2Stylised Facts 272
20.3What Is the Disinflation Cost of Administered Prices? 274
20.4Does It Matter Whether Administered Prices Grow Between 2 and 4 Percent and Below 4 Percent as Opposed to, for Instance, 4 Percent and Above? 276
20.5Do Administered Prices Affect Inflation Expectations? 278
20.6Conclusion and Policy Implications 279
References 281
21 Monetary and Fiscal Policy Interactions on the Inflation Process: The Role of the Fuel Levies Channel 282
21.1Introduction 282
21.2Stylised Facts 283
21.3What Are Fuel Levies Supposed to Do? 286
21.4The Interaction Between Fiscal and Monetary Policies via the Fuel Levies Channel 288
21.5Responses of the Repo Rate to Positive Inflation Shocks and the Role of Fuel Levy Channel 289
21.6Conclusion and Policy Implications 290
References 291
22 Monetary and Fiscal Policy Interactions in the Inflation Process: The Role of Public Transport Inflation Channel 293
22.1Introduction 294
22.2Inflation by Expenditure Deciles 295
22.3Dynamics in Transport Inflation 296
22.4Is There as Case for an Increased Role of Public Transportation? 297
22.4.1 Evidence from Cross-Correlations and Bivariate VAR 297
22.4.2 Evidence from the Responses of Inflation by Expenditure Deciles to Positive Private and Public Sector Transport Inflation Shocks 298
22.5Evidence from the Role of the Public Transport Inflation Channel in Transmitting Petrol Prices Shocks to Headline Inflation 300
22.5.1 Interaction Between Monetary and Fiscal Policies via the Public Transport Inflation Channel 301
22.5.2 Evidence from Inflation by Expenditure Deciles and Rural Areas 302
22.6Conclusion and Policy Implications 303
Appendix 304
References 306
23 Monetary Policy and Inflation Rates by Expenditure Deciles and Rural Areas 307
23.1Introduction 307
23.2The Effects of Monetary Policy on Inflation Rates by Deciles and Rural Areas 310
23.3The Asymmetric Effects of Monetary Policy on Inflation Rate by Expenditure by Deciles and Rural Areas 311
23.4What Is the Role of Petrol Price Inflation on the Impact of the Repo Rate on Headline Inflation? 313
23.5Conclusion and Policy Implications 314
References 315
Part VI Asymmetric Interest Rate Pass-Through 316
24 Is There Evidence of Asymmetries in the Adjustment of the Lending Rate Responses to Repo Rate Changes? 317
24.1Introduction 318
24.2What Is the Nature of the Association Between Loan Intermediation Mark-Ups and the Interest Rate Pass-Through? 320
24.3Are the Sizes of the Interest Rate Pass-Through and Loan Intermediation Mark-Up Coefficients Similar During Monetary Policy Tightening and Loosening Episodes? 322
24.4Evidence from the Time-Varying Approach 324
24.4.1The Relationship Between the Time-Varying Interest Rate Pass-Through with Prevailing Economic Conditions? 325
24.5Is There Evidence of the Amount and Adjustment Asymmetry Between the Weighted Lending Rate and Repo Rate? 328
24.6Is There a Momentum in the Direction of the Lending Rate Spread Post 2007M7? 330
24.7Conclusion and Policy Implications 331
Appendix 332
References 333
25 Is There Evidence of Rigidity in the Corporate Lending Rate Adjustment Following Repo Rate Changes? 335
25.1Introduction 336
25.2Is There Evidence of a Cointegrated Relationship Between the Repo Rate and the Corporate Lending Rate? 337
25.2.1Evidence from the MTAR Approach 339
25.2.2 Evidence from the Asymmetric Error Correction Model 341
25.3Conclusion and Policy Implications 342
Appendix 343
References 345
26 Does the Flexible Mortgage Rate Exhibit Asymmetric Response to Changes in the Repo Rate? Are the Effects Consistent with Upward or Downward Rigidity? 346
26.1Introduction 347
26.2What Is the Nature of the Relationship Between Flexible Mortgage Rates and the Repo Rate? 348
26.3Inferences from the Enders and Siklos (2001) Momentum Threshold Approach (MTAR) 350
26.4Conclusion and Policy Implications 354
Appendix 355
References 355
27 What Is the Role of Competition in the Banking Sector on the Interest Rate Pass-Through and Loan Intermediation Mark-Up? 357
27.1Introduction 358
27.2Relationship Between the Interest Rate Pass-Through, Loan Mark-Ups, Banking Sector Competition and Selected Key Banking Sector Indicators 360
27.3How Does the Interest Rate Pass-Through and Loan Intermediation Mark-Up Respond to the Shocks in the Banking Sector Competition Regimes? 364
27.4What is the Impact of Banking Sector Competition on the Long-Run Impact of the Repo Rate on Lending Rates? 366
27.4.1What Does the Counterfactual Analysis Evidence Suggest the Role of the Banking Sector Competition on the Repo Rate Pass-Through to Lending Rates Is? 366
27.5Do the Banking Sector Competition Regimes Impact the Asymmetric Response of Lending Rates to Repo Rate Tightening and Loosening Shocks? 368
27.6What Is the Role of Excess Capital Adequacy Ratio on the Responses of the Interest Rate Pass-Through and Loan Mark-Ups to Competition Regimes in the Banking Sector? 373
27.7Conclusion and Policy Implications 374
References 375
28 Does Consumption Growth Respond Asymmetrically to Positive and Negative Repo Rate Changes? 377
28.1Introduction 377
28.2Cointegration Analysis 379
28.3Asymmetric Responses to Repo Rate Changes and the Speed of Adjustment 381
28.4Additional Robustness Tests for Asymmetry 383
28.5Conclusion and Policy Implications 384
References 385
29 Does the Household Financial Wealth Explain the Asymmetric Response of Consumption to Monetary Policy Shock in South Africa? 387
29.1Introduction 387
29.2The Channels of Transmission of Positive Repo Rate Shocks to Household Consumption 389
29.3Does Household Wealth Affect Household Consumption Asymmetrically? 390
29.4Evidence Based on the Exogenous–Endogenous VAR Model 393
29.5Conclusion and Policy Implications 395
References 395
References 397
Index 410