Cause and effects of inflation- Article review and further discussion
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Inflation- Review of three articles
The first article focuses on the impact of globalization upon inflation. It has been stated that different countries have different currencies that over time unemployment-and-inflation/rency fluctuation is normal. The rate of inflation is determined by the central bank of each nation. The central banks of every nation are responsible for maintaining economic stability as well as price. It can be stated that an open economy is more likely to tackle the effect of globalization. In an open economy, shortfalls along with excesses can be absorbed partially by other nations and one single nation will be able to tackle the sudden rise or fall of demand.
The second article is on drivers of inflation and it suggests that central banks tend to monitor surveys as well as market-based indicators. The term inflation compensation has been used because it is an addition to the expected inflation. The market participants are given risk premiums so that they are willing to take risks that might be related to outcomes of inflation. In this article, a comparative analysis of U.S and U.K has been done and focus has been given on the nation’s economic activities, risky asset prices and exchange rates.
The third article is about identification of the various impacts of inflation as well as unemployment. It suggests that despite economic volatility, domestic expansion occurs. Moreover, expansion at the domestic level and at abroad has been occurring in a synchronized manner. Further attempts have been made to increase the employment rate of Americans. Labor market has been strengthened and positive outcomes are expected as well. New entrants in the labor market has been noticed and the overall labor force participation is stable as well. Previously, economists believed that labor market changes might create an upward pressure and inflation might increase. However, this is not always the case.
Further discussion on inflation
According to (Svensson, 1997), inflation targeting can imply forecast targeting. The central bank is accountable for inflation forecast and it has now become an explicit target. In case of inflation forecast targeting, the monetary policy is consistently implemented and monitored. Based on the degree of output stabilization, adjustments in the inflation forecast takes place. Due to the adjustments, the inflation target is achieved. Moreover, inflation variability also occurs when the exchange rate and the money growth is inferior. It would be better for countries to stay committed to target-related rules rather than staying committed to instrumental rules.
As per (Galı, Gertler & Lopez-Salido, 2001), the era between 1970 to 1998 can be considered for understanding the dynamics of European inflation and the characteristics of the inflation that can be identified. A comparison has been done between European inflation and inflation in the U.S. In this study, the underlying factors behind inflation has been noted and analyzed. The factors that have been considered to understand the European inflation dynamics are marginal cost related cyclical behavior along with other components such as real wages and labor productivity. The findings of the study shows that New Phillips Curve or NPC tends to fit the area data fully and the data fits better than the data of U.S. and it is substantial to understand the level of price stickiness. In comparison to the U.S, it has been found that inflation dynamics that occurred in the Euro area is more forward-looking. Moreover, the findings also suggest that European inflation is the result of frictions that occurred in the labor market during that era. It has definitely shaped the behavior related to marginal costs. Frictions or changes in the labor market have been manifested in the wage markup behavior.
References
Galı, J., Gertler, M., & Lopez-Salido, J. D. (2001). European inflation dynamics. European economic review, 45(7), 1237-1270.
Svensson, L. E. (1997). Inflation forecast targeting: Implementing and monitoring inflation targets. European economic review, 41(6), 1111-1146.