Three Essays on Monetary Economics

Abstract

This thesis consists of three chapters. A common theme across these chapters is to understand and evaluate the dynamics of inflation and expectations. In the following, the results of the individual chapters are presented. Chapter 1: Anchoring Inflation Expectations From Below: New Evidence From the European Commission's Consumer Survey Inflation rates in the euro-area member states have been remarkably low in the aftermath of the global financial crisis. This chapter investigates the effects of this evolution in the inflation environment on the degree of consumers' inflation expectations anchoring. For that, we propose a new anchoring measure based on the aggregate qualitative expectations answers from the European Commission's consumer survey. Our indicator reveals a significant heterogeneity across euro-area countries. Therefore, we employ panel regressions to test the extent to which consumers' expectations are well anchored by comparing across various inflation environments. We find that the degree of anchoring is particularly weak when inflation is below the ECB price stability target. The deviations of inflation from the target only exerts a negative impact on the anchoring degree of consumers' expectations when inflation is low or persistently so. For the European Central Bank, this alerts that the degree of consumers' anchoring has deteriorated in the recent period of low inflation than was the case when inflation rates were more often around the price stability target across the euro area. Chapter 2: The Information Content of Market-Based Measures for the Long-Term Inflation Expectations of Professionals: Evidence from a MIDAS Analysis Long-term inflation expectations taken from the Survey of Professional Forecasters are a major source of information for monetary policy. Unfortunately, they are published only on a quarterly basis. This chapter investigates the daily information content of market-based measures, such as inflation-linked swaps and breakeven inflation rates, for the next survey outcome. Using a Mixed Data Sampling approach, we establish that professional forecasters account for the daily dynamics of market-based measures when they submit their long-term inflation expectations. We propose a daily indicator of professionals' expectations which outperforms alternative indicators that ignore the high-frequency dynamics of market-based measures. To illustrate the usefulness of the new indicator, we provide new evidence on the (re-)anchoring of U.S. inflation expectations.

Chapter 3: Whither Egypt Monetary Policy? An Analysis of the Post 2005 Progressions A review of the monetary business-cycle literature on Egypt reveals several anomalies with respect to the effectiveness, direction, and magnitude, of various monetary transmission mechanisms, such as interest rate and exchange rate. This chapter models Egypt's monetary policy during the transition period to explicit inflation targeting in the last decade while directly consider the foreign component of that policy which has been marginalized in early literature. Our results deliver solutions to the anomalies reported in prior evidence. First, the dynamic impact of domestic interest rate on inflation rate is now plausible and much stronger than reported before. This is an imperative step forward to implementing the inflation-targeting regime proposed by the Central Bank of Egypt. Second, the effects of exchange rate on main macroeconomic variables are still as strong as reported in previous periods despite that the latter was officially relaxed as a nominal anchor since 2003. Third, the leverage of foreign policy shocks on the economy is no less than that of domestic shocks.