The CPI–PCEPI Inflation Differential: Causes and Prospects

The Federal Open Market Committee’s inflation target is stated in terms of the personal consumption expenditures price index (PCEPI). The PCEPI, like the consumer price index (CPI), measures inflation in the expenditures of households, but these indexes differ in purpose, scope, and construction. Notably, since the CPI is used as the reference rate for numerous financial contracts, one can derive implied longer-run CPI inflation forecasts from financial contracts. Such forecasts are widely reported. But if policymakers are to use these forecasts to guide their pursuit of the inflation target, they need to translate these CPI inflation forecasts into corresponding implied PCEPI forecasts. Since 1978, CPI inflation has averaged 0.3 percentage points above PCEPI inflation, but this differential has varied significantly over time. In this Commentary, we explain why, investigate a key historical episode, and provide an updated estimate of the likely differential going forward.

Purchasing Power Parity Theory and Applications for Solomon Islands

<p><em>We have tested the purchase power parity hypothesis using the consumer price index of USA and UK against Solomon Islands for the sample monthly period from January 1993 to December 2013. This paper uses cointegration and the error correction as methodologies as the data are found to be non-stationary. The result shows that the changes in Solomon Dollars (SBD) per USD are influenced by the long term trends in the price differential of Solomon Islands and the USA. We further investigate the changes in the price differential between Solomon Islands and the UK and establish that they both have a similar trend. The paper asserts that the inflation differential is in the direction of the appreciation of the SBD/USD and SBD/UK pound which supports the PPP theory in the long run. The symmetry and proportionality of the strong version of PPP were found to be very significant for Solomon Islands against UK pound sterling only and not against USA Dollars.</em></p>

Determinants of the Islamic Stock Markets Integration

This study examines the macroeconomic determinants of Islamic stock markets integration among 10 selected Islamic stock markets. Both pooled OLS and panel data regressions are used in this study over the period spanning from 2010 to 2014. Some of Islamic stock markets are less integrated thus there is opportunity to gain from international portfolio diversification. However, there are some Islamic stock markets are strongly integrated. The results from the Pooled OLS show that all variables are insignificant explaining the Islamic stock markets integration. From the panel estimation, the study revealed that only GDP growth differential and inflation differential are significant influencing the Islamic stock markets integration. The higher dispersion of GDP and inflation rate the more integrated the Islamic stock markets. The results of this study have significant implications on international investors (potential risks and returns of international diversification) and on policy makers (formulation of financial policies and financial liberalization).

The Monetary Policy of the National Bank of Romania in The Inflation Targeting Era. A Taylor Rule Approach

In this paper we analyse the monetary policy of the National Bank of Romania during 2005-2015 by estimating the Taylor rule, on a quarterly basis. We determined the potential GDP by employing the Hodrick-Prescott filter, in order to distinguish between the cyclical and the structural components of the output. Then, we estimated the traditional Taylor rule function (with a classic OLS regression), but slightly modified, as to take into account the forward-looking attitude of the NBR. The results confirm the direct correlation between the monetary policy rate and the output gap on the one hand, and the inflation differential (inflation - inflationtarget) on the other hand. Also, the results show us that NBR paid a higher attention to the dynamics of the inflation versus its target than to the output gap. Last, but not least, the central bank has been also sensitive to the financial stability, as reflected by the results of the incorporation of the ROBOR-EURIBOR spread in the classical Taylor rule.

Net capital flows to and the real exchange rate of Western Balkan countries

This paper uses Granger causality tests to assess the linkages between changes in the real exchange rate and net capital inflows using the example of Western Balkan countries, which have suffered from low competitiveness and external imbalances for many years. The real exchange rate is a measure of a country?s price competitiveness, and the paper uses two concepts: relative unit labour cost and relative inflation differential. The sample consists of six Western Balkan countries for the period 1996-2012, relative to the European Union (EU). The main finding is that changes in the net capital flows precede changes in relative unit labour costs and not vice versa. Also, there is evidence that net capital flows affect the inflation differential of countries, although to a less discernible extent. This suggests that the increasing divergence in the unit labour cost between the EU and Western Balkan countries up to the global financial crisis was at least partly the result of net capital inflows. The paper adds to the ongoing debate on improving cost competitiveness through wage restrictions as the main vehicle to avert the accumulation of current account imbalances. It shows the importance of changes in the exchange rate regime, reform of the interaction between the financial and the real sector, and financial supervision and structural change.

Estimating the impact of the Balassa-Samuelson effect in central and eastern European countries: A revised analysis of panel data cointegration tests

This paper aims to reassess the contribution of the Balassa-Samuelson effect to the inflation and real exchange rate appreciation using panel data for nine CEECs covering the period ranging from the mid-1990s to the third quarter of 2010. The main idea of this analysis is to answer the question of whether the Global Economic Crisis had a significant impact on the efforts of CEECs to stay on the path of real convergence. The Balassa-Samuelson effect explains less than 1.5 percentage points on average of inflation differential relative to the euro area and around 1 percentage point of the total domestic inflation. The results are robust across the model specification and estimation method. Most of the results point out that the Balassa-Samuelson effect has not changed considerably during the crisis even though it is lower compared to that in the earlier stage of transition (for the period up to 2004).