Does domestic output gap matter for ination in a small open economy?

Transcription

1 Does domestic output gap matter for ination in a small open economy? Aleksandra Haªka and Jacek Kotªowski Zurich

2 Plan of the presentation 1 Motivation 2 Model 3 Data 4 Results 5 Conclusion

3 Plan of the presentation 1 Motivation 2 Model 3 Data 4 Results 5 Conclusion

4 Motivation The weakening of relationship between ination and domestic output gap in many economies during last two decades: globalization process (Borio and Filardo, 2007, Chmielewski and Kot, 2006) in 90-ies and in the beginning of 2000-ies stable and low ination due to higher credibility of central banks (Blanchard and Gali, 2007, Evans and Fisher, 2011) in the second half of 2000-ies heightened ination due to long lasting positive shocks to food and fuel prices counter-cyclical impact of increase in taxes and regulated prices This weakening may be more pronounced for small open economies, which are more sensitive to external shocks and to global output gap The core ination measures are usually weakly correlated with the domestic output gap (Chmielewski and Kot, 2006) We search for components of the ination index which are sensitive to domestic demand

5 Method Disaggregated analysis using price indices at the COICOP 4-digit level We check which groups of goods and services constituting CPI in Poland react to changes in domestic economic activity measured as an output gap We analyse the sensitivity of disagregated price groups of goods and services to the exchange rate channel

6 Literature Phillips curve for aggregated data - a lot of research in DSGE models - i.e. Del Negro et al. (2007), univariate model - i.e. Razzak (2002), Rumler and Valderrama (2010) small open economies - Guender and Xie (2006) The sensitivity analysis of disagregated price indices in respect to the output gap: Bryan, Meyer (2010) - dierentiated between sticky and exible prices which are more sensitive to changes in economic activity in the US Fröhling, Lommatzsch (2011) - dissagregated Phillips curves for euro area as a whole and for member countries backward looking only lagged ination (y/y) and economy-wide output gap

7 Plan of the presentation 1 Motivation 2 Model 3 Data 4 Results 5 Conclusion

8 Small open economy Phillips curve Gali and Monacelli (2005) proposed a NK Phillips curve basing on a small open economy version of the Calvo sticky price model For the empirical analysis hybrid NKPC extensively used - relates current ination to both future and past ination Aggregated small open economy hybrid NKPC for Poland: Kªos et al. (2005), Przystupa and Wróbel (2009) - analysis of monetary policy transmission mechanism, Baranowski and Leszczy«ska (2011) - forecasting performance in respect to the ination.

9 Phillips curve for disaggregated data From a theoretical point of view disaggregated price indices should be related to disaggregated (sectoral) output gaps, but: the structure of the CPI basket specied on the basis of households' budgets survey the prices in the CPI calculated using the individual quotations of particular services and goods in retail trade while output gap usually measured using GDP, industrial production or some labour market variables Output gap measures do not match with the structure and methodology of CPI basket - problem with sectoral output gaps for CPI categories

10 Phillips curve for disaggregated data Sectoral output gaps approximated by economy-wide output gap Backward looking version of the Phillips curve which matches data better than forward looking and hybrid PC: π i,t = α 0 + P p=1 α p π i,t p + βȳ t 1 + γer t 1 + δcontrol t + ε i,t where π i,t - a quarterly ination in i-th category of goods and services, y t - an economy-wide output gap, er t - a quasi-real exchange rate (a sum of an eective nominal exchange rate and foreign ination), control t - the variables (only for food and fuel categories) express the relative growth of food or fuel prices to foreign ination

11 Plan of the presentation 1 Motivation 2 Model 3 Data 4 Results 5 Conclusion

12 Data Consumer Price Index (CPI) disaggregated to COICOP 4-digit level Output gap - two alternative measures: based on the production function from the National Bank of Poland structural macroeconometric model (NECMOD) - see Budnik et al. (2009) derived using HP lter Exchange rate: Nominal eective exchange rate plus foreign ination (EA + US) Control variables: relative growth of food and fuel prices to foreign ination Seasonally adjusted quarterly data Sample: 1999Q1-2012Q2

13 CPI structure in Poland Source: Own calculations, Polish Central Statistical Oce data.

14 Estimation of disaggregated Phillips curves Phillips curve π i,t = α 0 + P p=1 α p π i,t p + βȳ t 1 + γer t 1 + δcontrol t + ε i,t Estimation of 220 models (110 indices times two alternative measures of an output gap) Individual Phillips curves estimated (equation by equation) with the OLS using Newey-West correction The categories of goods and services classied as price sensitive to domestic output gap if the output gap statistically signicant at 10% signicance level Two lags of ination and one lag of an output gap and exchange rate The results are quite robust in respect to the choice of output gap measure

15 Plan of the presentation 1 Motivation 2 Model 3 Data 4 Results 5 Conclusion

16 Goods and services sensitive to the output gap NECMOD gap HP gap weight weight weight in CPI in category in CPI in category in CPI All services durable semi-durable non-durable administered Source: Own calculations.

17 Services sensitive to the output gap weight in category Sensitive weight in CPI Restaurants Housing 13.0 (21.0) 3.7 (5.9) Health Tourism 5.1 1,4 Personal care 1.3 0,4 Hotels 1.2 0,3 Recreation 1.0 0,3 Non-sensitive Communication Transport Insurance Education Source: Own calculations.

18 Non-durable goods sensitive to the output gap NECMOD gap HP gap weight weight weight in CPI in category in CPI in category in CPI Unprocessed food Processed food Energy Source: Own calculations.

19 Semi-durable goods sensitive to the output gap weight in category weight in CPI Sensitive Household textiles and equipment Non-sensitive Clothing and footwear ,8 Recreation and culture from which: Games, toys and hobbies Books Small electric household appliances Source: Own calculations.

20 Durable goods sensitive to the output gap weight in category weight in CPI Sensitive Furnitures and furnishings Non-sensitive Purchase of vechicles ,5 Audio visual appliances Household appliances Source: Own calculations.

21 Goods and services sensitive to the exchange rate channel NECMOD gap HP gap weight weight weight in CP in category in CPI in category in CPI services durable semi-durable non-durable administered globalisation Source: Own calculations. Category globalization comprises the goods usually decribed as beeing inuenced by globalization.

22 Goods inuenced by globalization The goods inuenced by globalization: clothes and footwear, games and toys, audio visual equipment, electrical appliances for personal care, equipment for sport and recreation They constitute 8.8% of the CPI basket weight in category weight in CPI Sensitive to the output gap Sensitive to the exchange rate Source: Own calculations.

23 Goods inuenced by globalization 10,00 9,00 8,00 7,00 6,00 5,00 4,00 3,00 2,00 1,00 0,00 Goods influenced by globalization (as a % of CPI basket) Import from China (as a % of total import) Source: Own calculations, NBP and Polish Central Statistical Oce data.

24 Goods inuenced by globalization 115,0 110,0 Globalization CPI 105,0 100,0 95,0 90,0 Jan-99 Nov-99 Sep-00 Jul-01 May-02 Mar-03 Jan-04 Nov-04 Sep-05 Jul-06 May-07 Mar-08 Jan-09 Nov-09 Sep-10 Jul-11 May-12 Mar-13 Source: Own calculations, NBP and Polish Central Statistical Oce data.

25 Index of demand sensitive goods (IDSG) We aggregate the price indices of goods and services sensitive to the output gap The new index: the index of goods and services sensitive to output gap (IDSG - index of demand sensitive goods) Includes the price categories which have been statistically signicant at 10% level The weights are assigned according to weights in the CPI basket

26 IDSG - features Measure of inationary pressure in the economy stemming from excessive domestic demand IDSG has some advantages over the output gap: IDSG allows quantifying the excessive demand pressure in terms of price development. The index can be directly compared with the CPI and core ination measures Calculated on a monthly basis which reduces the lag substantially While the IDSG covers almost all goods sensitive to exchange rate, the monitoring of the index may give an additional information to the central bank when conducting the monetary policy and address the question to what extent the ination is beeing inuenced by the domestic monetary policy (interest rate channel and exchange rate channel)

27 IDSG vs CPI Source: Own calculations, NBP and Polish Central Statistical Oce data.

28 Descriptive statistics for selected ination measures Index mean standard deviation CPI Ination excluding administered prices Ination excluding most volatile prices Ination excluding food and energy prices % trimmed mean ination Ination of goods inuenced by globalization IDSG_Y 4.4 2,5 IDSG_HP Source: CSO and own calculations. Rows 3-6 contain statistics for core ination measures calculated by NBP. In rows 7-8 the respective statistics for two variants of index of output gap sensitive prices are included. IDSG_Y is the index derived using output gap from NECMOD model while IDSG_HP has been calculated with the output gap derived using HP lter

29 Index of demand sensitive goods vs output gap Aggregated Phillips Curve π t = α 0 + P p=1 α p π t p + βȳ t 1 + γer t 1 + δcontrol t + ε i,t where: π t - ination measure (IDSG, CPI, two core ination measures) ỹ t - domestic output gap er t - eective nominal exchange rate plus foreign ination control t - relative food and fuels prices growth abroad Estimation by OLS and GMM to check for endogeneity problem

30 Sensitivity of ination measures in respect to the output gap Ination measure NECMOD gap HP gap IDSG ( ) CPI ( ) CORE ( ) COREADM ( ) Source: Own calculations. OLS GMM OLS GMM ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) The numbers in the table are estimates and standard errors of parameters expressing the impact of the output gap on ination for dierent output gap and ination measures in aggregated Phillips curve Abbreviation CORE denotes ination excluding food and energy while COREADM is ination excluding administered prices.

31 Plan of the presentation 1 Motivation 2 Model 3 Data 4 Results 5 Conclusion

32 Findings 1 More than 55 per cent of the categories in the CPI basket react to the output gap. 2 The categories mostly linked to domestic output gap are services but also non-durable goods. 3 Prices of more than half of the items in either unprocessed or processed food as well as energy categories are inuenced by changes in domestic demand. 4 Only a small share of durable and semi-durable goods react to domestic output gap - to some extent due to globalization process. 5 One third of the price indices respond to exchange rate channel. 6 The impact of exchange rate is most signicant on durable and semi-durable goods which are to a large extent perceived as tradable goods. 7 Only 30 per cent of goods perceived as beeing inuenced by globalization react to domestic output gap while 12.5 per cent are sensitive to exchange rate movements.