BIS国际清算银行-Inflation-at-risk-from-Covid-19_9页_918kb

BIS Bulletin Summary: Inflation at Risk from Covid-19

Key Takeaways

• The pandemic has increased downside tail risks in advanced economies (AEs) and both downside and upside tail risks in emerging market economies (EMEs).
• The collapse in output and oil prices has, on balance, increased downside inflation risks.
• Recent exchange rate depreciations in EMEs have increased upside inflation risks.
• Tighter financial conditions raise both downside and upside inflation risks, with a more pronounced effect on AEs.

Core Content

The document analyzes how the Covid-19 pandemic has affected inflation risks in both advanced and emerging market economies (EMEs). It uses an inflation-at-risk framework based on a Phillips curve model, which incorporates factors such as output growth, inflation, exchange rates, oil prices, and financial conditions. The analysis is grounded in quantile regression, allowing for the assessment of how different economic and financial shocks affect the tails of inflation distributions.

The study examines eight major economies (12 AEs and 31 EMEs) and finds that:

• In AEs, the main driver of increased downside inflation risks is the output collapse and tightened financial conditions.
• In EMEs, exchange rate depreciations and financial conditions have a more significant impact on both downside and upside inflation risks.
• The oil price drop leads to a leftward shift in inflation distributions, but it reduces upside inflation risks more than it increases downside risks.
• Equity return volatility increases upside inflation risks, especially in EMEs.
• The zero lower bound (ZLB) on interest rates is associated with lower inflation risks in both AEs and EMEs.

Key Findings

Inflation Risks in Advanced Economies

• The output collapse and tightened financial conditions are the main contributors to increased downside inflation risks.
• Downside risks are more prominent than upside risks in AEs.
• The impact of the ZLB on inflation risks is negative, indicating that zero interest rates are associated with lower inflation risks.

Inflation Risks in Emerging Market Economies

• Exchange rate depreciations and financial conditions have a larger effect on inflation risks compared to AEs.
• The right tail (upside risks) of inflation distributions is more sensitive to exchange rate and financial conditions.
• Oil price drops lead to leftward shifts in inflation distributions, but they reduce upside inflation risks more than downside risks.

Methodology

• The analysis uses a panel quantile regression approach, pooling data from 43 economies (12 AEs and 31 EMEs) from 1990 to 2019.
• The model includes output growth, inflation, exchange rate, oil prices, and financial conditions as key drivers of inflation.
• The study focuses on four-quarter-ahead inflation distributions and how they have changed due to Q1 2020 shocks.
• The effects of financial conditions are analyzed through equity return volatility and ZLB dummy variables.

Implications

• Central banks are increasingly using scenario analysis and inflation-at-risk frameworks to understand economic and financial risks.
• The effects of exchange rate swings are more pronounced in EMEs than in AEs, likely due to higher exchange rate pass-through.
• Fiscal variables are not considered in the current analysis, which could be relevant for a more comprehensive understanding of inflation dynamics.
• The lockdowns may have altered consumption patterns, making headline price indices less indicative of changes in the cost of living.

Conclusion

The study concludes that the Covid-19 crisis has significantly increased inflation risks in both AEs and EMEs. In AEs, the output collapse and tightened financial conditions are the primary drivers of downside risks, while in EMEs, exchange rate depreciations and financial conditions are more influential in shaping both downside and upside risks. The framework highlights the importance of monitoring tail risks in inflation when designing monetary policy responses.

References

• Adrian, T, N Boyarchenko and D Giannone (2019): "Vulnerable growth", American Economic Review, vol 109, no 4, pp 1263-89.
• Alvarez, F, M Beraja, M Gonzalez-Rozada and P Andres Neumeyer (2019): "From hyperinflation to stable prices: Argentina's evidence on menu cost models", Quarterly Journal of Economics, vol 134, no1, pp 451-505.
• Banerjee, R, J Contreras, A Mehrotra and F Zampolli (2020): "Inflation at risk in advanced and emerging economies", mimeo.
• Bank for International Settlements (2019): BIS Annual Economic Report 2019, June.
• Bloom, N (2009): "The impact of uncertainty shocks", Econometrica, vol 77, pp 623-85.
• Eser, F, P Karadi, P Lane, L Moretti and C Osbat (2020): "The Phillips curve at the ECB", ECB, Working Paper Series, no 2400.
• Gilchrist, S, R Schoenle, J Sim and E Zakrajšek (2017): "Inflation dynamics during the financial crisis", American Economic Review, vol 107, no 3, pp 785-823.
• Lopez-Salido, J and F Loria (2019): "Inflation at risk", CEPR Discussion Papers, no 14074.
• Nakamura, E and J Steinsson (2011): "Price setting in forward-looking customer markets", Journal of Monetary Economics, 58, pp 220-33.

Table 1: Changes in Economic and Financial Conditions in Q1 2020

Notes:

• GDP is quarter-on-quarter change; numbers in parentheses are Consensus estimates for 2020 GDP growth converted into quarterly growth rates.
• Exchange rate and oil price (West Texas Intermediate (WTI), in local currency) are quarterly averages.
• Using Brent instead of WTI results in approximately the same price decline.
• Equity return volatility is standard deviation of daily returns, using benchmark indices.
• Increase in nominal effective exchange rate (NEER) denotes an appreciation of local currency.
• The historical distribution for the 43-country panel runs from 1990 to 2019.

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