Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Full employment wikipedia , lookup
Fear of floating wikipedia , lookup
Exchange rate wikipedia , lookup
Great Recession in Russia wikipedia , lookup
Monetary policy wikipedia , lookup
2000s commodities boom wikipedia , lookup
Interest rate wikipedia , lookup
Nominal rigidity wikipedia , lookup
Phillips curve wikipedia , lookup
GOLD, BLACK GOLD, STEEL and WORLD INFLATION: A SAS® STUDY Kamal Shoukry, Loyola Marymmmt University, Los Angeles The variable year is used to indicate the dates. It has not been used as an independent variable in order to avoid masking the influence of the important economic variables.The independent variables: gold price per ounce (gldp), dollar price of oil or black gold per barrel (blgp), scrap steel price per ton (stlp), US unemployment rate (usur), US real GDP in 1996 fixed dollars (rgdp), annual % change in rgdp ( dgdp), British consumer price index (bcpi), U.K. exchange rate index (bxri), and the Sterling or the Great Britain Pound GBP exchange rate (ukxr), all in 31 observations. Abstract The pUIJlOSe of this study is to estimate the comparative influences of some causes of inflation using PROC's STEPWISE, REG, CORR, and ARIMA. Reasons for recent unusual gold price relative stability, US$ strength and GBP stability are also considered. The Stagflation of the Seventies The petroleum oil (black gold) embargo of the 1973 has increased energy costs and led to a stagflation which is a combination of inflation and stagnation (recession). In theory this is known as an external supply shock causing aggregate supply to shift inward and up thus leading to cost push inflation and unemployment. A policy of economic expansion was followed to cure recession has caused another type of inflation known as demand pull inflation. Coal miners during that period went on a strike requesting a 30% wage increase and got what they wanted Wage increases are another source or cause of cost push inflation, coal enters in the production of steel. Like oil energy, steel is a key commodity whose price if increased would cause a general inflation of all products in the economy. Factory and farm machinery, vehicles and a vast number of products are made out of steel. Almost overnight cars and machinery prices soared high. Strong inflationary pressures added to nominal interest, that is , the cost of borrowing, further worsening cost push and discouraging spending and thus recession. The unemployment rate reached 8.5 %in 1975. Some Important Correlation Coefficients Gold and oil77.7 %, gold and acpi 60%, gold and bcpi 52 %, gold and bxri -53 %. Oil and usur 43 %, oil and bcpi 32 %, oil and ukur 49 %, oil and ukxr- 48 %. Steel and acpi 70 %, steel and rgdp 81 %, steel and bcpi 80 %; acpi and rgdp 96 %, acpi and bcpi 99 %; bcpi and rgdp 98 %, acpi and bxri -75 % ; bxri and rgdp -66 %; bxri and bcpi - 70 % because inflation erodes the value or purchasing power of the currency. The Regression Model With acpi as the dependent and except the year all other variables in the model are independent . The modei gave the following quantities. RSquare 99.65 %, Adj R-Sq 99.48 %, F Value 575.66, CV 3.0, Root MSE 3.13688, Pr > F: < .0001, Durbin Watson D 1.551, and 1st Order Autocorrelation 0.211 . Stepwise Regression Five independent variables were selected as significant at the 0.1500 level. Those are : bcpi, gldp, bxri, ukxr, and blgp, with an F-value of 1645 .43, and aPr >F of<.OOOl. Model RSquare is 99.55%. The selection of three British variables indicates the very strong relationships between the British and American economies. This also justifies the selection of the British Economy in this study to represent Europe as the rest of the world (ROW) from the US viewpoint. In fact the British economy can be considered the strongest economy in Europe and its currency was recently the most stable. The recent victory of the Labor Party over the Conservative has been mainly attributed to the strength of the economy rather than the political disagreements among some members of the conservative party. Does History Repeat Itself At the beginning of 1999 the price per barrel of oil was almost $10. By the end of the same year that price has more than tripled reaching $32. Similar effects though not necessarily exact were expected to occur. Symptoms seemed to support such conclusion. The Fed raised interest in 2000 to combat inflation then lowered it five times during five months to counteract recession. A model of twelve variables is used here to examine the data obtained. Variables and Symbols The dependent variable is the American consumer price index (acpi) tracing the price level and implying the inflation rate. 564 rates , which can actually bring about higher future rates. Stoek Marke t Evidence The stock markets now operate within a high degree of uncertainty because the econom y seems hesitan t betwee n expansi on and contraction. Investo rs' behavio r is influenced by the announ cement effects. Any news about a modest increase in a corpora tion's profits create optimis m and vice versa . During the week of the Memor ial Day, a slight fall in unempl oyed made the Dow climb above the 11000 level. The following week after the end of the Memorial Day when the number of the unempl oyed requesting compen sation increased the Dow plunged down below the 11,000 level. Clearly, !hese are signs of a slowing down economy, and m fact the unempl oyment rate has actually increas ed from 4.2 % in 1999 to 4.4 % in 2000 to 4.5 in 2001. Arima Forecasts The following are forecasts ofUS consum er price index (acpi) and unempl oyment rates (usur) for twelve years beyond the year 2000. year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Quantitative Effects eomparisons In the 1970's the oil embarg o started in 1973. The price per barrel of oil rose from $ 3.6 in 1972 to$ 10.4 in 1974. Gold price rose from$ 58.2 in 1972. $ 97.3 in 1973 to$ 159.3 in 1974. Steel price was$ 35.3 in 1972 then rose to $159.3 in 1974. The price level index rose from 41.8 in 1972 to 49.3 in 1974. The unemployment rate rose from 4.9 in 1973 to 8.5 in 1975. We here note the increase in both inflation and unempl oyment rates known as Stagflation. Real GDP which has increased in 1972 by 6.6% droppe d by- 1.3 % in 1974 . British price index (bcpi) rose from 54.7 in 1973 to to 63.7 in 1975, while the unempl oyment rate rose from 5.8 to 10.1 for the same period. Lookin g at recent develop ments it is quite well known that fast econom ic growth leads to inflation and that inflation paves the way to a recession. How then can we tell the. difference betwee n this case and the stagflat ion case ? In the fast growth case ' things happen gradual ly over time but in a shock stagflat ion due to an aggregate supply things happen sudden ly . There are remote effects in the first case and immedi ate impacts in the second case. In early 2000 the Fed raised interest twice to tame some sudden inflationary pressur es and stood ready to raise interest for the third time since the announ cement by the Departm ent of Labor that the consum er price index rose by .7 of 1 % during the month of March which is equival ent to an annual inflation rate of 8.4 % . This price index does not include two of the most inflated items namely food and energy . Possibl y the reason for that exclusion is to avoid expectations of higher future inflation acpi 176.30 180.61 184.37 188.63 192.39 196.65 200.41 204.67 208.42 212.68 216.44 220.70 usur 4.51 4.68 4.53 4.53 4.40 4.51 4.45 4.55 4.44 4.51 4.41 4.50 Conclusions The strength of the Americ an econom y become s evident when the value of its currenc y is compared to the currenc y of the second largest which is the Japanese econom y. The US$ was equivalent to 145 Yen in 1985. The Asian Crisis brough t this value down to 100 or 99 Yen in the year 2000. After a year of relative stability its value continu ed to climb 124 then slightly down to 122 during 2001 and this is where it is now in mid June 2001 GBP. After wide fluctuations during 1982 and 1994 , that is down from 100% of its value to 75% in 1985 then up to its full value betwee n 1988 and 1993 then down to relative stability fluctuating within narrow limits betwee n 85 % and 95 % . This relative stability is due to a stronge r British econom y during the first term of the Labor Party. The British did not elect to join The Euro group probab ly to have some time to find out how the Euro is going to do without Britain. The Euro started to circulate at $ 1.18 last year and its value continu ed to decline till now to become equival ent to $ 0.85 . The relative stability of the British currenc y implies a stronge r econom y than that of the Europe an contine nt in terms of faster growth , lower inflation and unempl oyment rates. The Labor Party leader has announ ced that Britain may soon join the Euro after a Nationa l Survey. This may strength en the Euro' s international value but this may require some upward adjustments in British prices in terms of the Euro. The 1999 unempl oyment rates for the US 4.2 % and for Britain 6.1 % , were the lowest 565 for each since 1970 , 4.9 and 6.5 respectively. The 99 % correlation coefficient between the US and British consmner price indices seems Amazing. It implies that both countries are strong trade partners. Since 1993 till2000 the Dollar value of the British pound fluctuated between $ 1.7 and$ 1.5 , a much greater recent Stability. Today in mid June 2001 it isS 1.37; it was$ 2.47 in 1970 which implies that the American economy has gained more strength relative to the British economy in terms of growth rates. The US average annual inflation rate during the 1970-2000 period is 5.095 % which is smaller than the British rate of 5.395 %. The British economy was inflating little faster leading to a gradual deterioration of the British currency relative to the American currency. Gold is an obvious indicator of inflation. Gold discoveries and the inflow of foreign gold may cause inflation after a year or two if not sterilized if its rate of increase exceeds the rate of increase of the production of goods. Black gold and steel price increases increase production costs leading to higher prices and inflation through cost push. Gold is also used for hedging against inflation. Monetary assets decrease in value during inflation. Gold prices usually increase faster than the prices of other goods. Holding gold as an asset instead of paper money help maintain or increase the real value of total assets. In 1979 inflation caused gold price to exceed $ 670 , then went down to fluctuate around the $ 400 level from 1982 to 1990 then to less than $ 300. Now in 2001 it fluctuates between$ 260-270. Gold is no longer essential as a reserve to monetary authorities as it was before. Britain sold gold in return for Dollars Yens and Marks The US is a net exporter of gold to the rest of the world. Gold prices are now much more stable than before. Finally, the ARIMA forecasts obtained assume the absence of economic policy which is applied whenever inflation and unemployment rates exceed the desirable limits. The forecast rates obtained here seem to be reasonable in the absence of supply shocks and their continuous increases in the price level. And for not forgetting the stock markets, the current appetite of stock markets speculators would make them optimistic and create a rally in the stock market with any sign of improvement in the economic performance. Hedging also is done by buying stocks provided that the rate of ii1,crease of the stock price exceeds the inflation rate. Contact Information The author may be contacted at: Kamal Shoukry Department of Economics Loyola Marymount University One LMU Drive, Suite 4217 Los Angeles, CA 90045-2659 Phone: (310) 338-2815 Fax: (310) 338-1950 e-mail: [email protected] References Gujarati, Damodar , Basic Econometrics, Third Edition, New York: McGraw-Hill, Inc., 1995 SAS Institute Inc., SASIETS User's Guide. Version 6. Second Edition, Cary, NC:SAS Institute Inc., 1993. SAS Institute Inc., SASIETS Software: Applications Guides 1 and 2, Version 6, First Edition, 1993. SAS Institute Inc., SAS/STAT User's Guide, Vols.Iandll, 1990Version6, Fourth Edition. Cary, N.C.: SAS Institute Inc. SAS Institute Inc., SAS System for Forecasting Time Series, 1986 Edition. 566