How UK Inflation Indexed Gilts Are Priced

Unit 6: In no more than 300 words, explain how changes in the Bank of England’s official rate can modify the impact of foreign inflation on domestic inflation.

The value of a bond is found as the present value of interest payments plus

The interest rates are expected to reach 7.0% by June, the most severally effected by these constant raises are shareholders. Because of these immediate effects market economists are largely against the interest rate hikes. Their position is that the average inflation rate over the past three years has been at around 2% close to the markets expected inflation rate of 1.9%. The economy is on a sixteen year run, continually moving forward. The historical data is there however; the consumer price index was at 1.6% over the past twelve months and the March year over year rate was at 3.7%

nominal 6% bond specified in the contract. The formula to find conversion factor is as follows:

c. Should the nominal cost of Debt or the effective annual rate be used? Since the bond pays a coupon semi-annually, and earns 4.75% in six months, it is possible to determine the effective annual rate (EAR), which we have successfully calculated above. EAR = 6.6% Nevertheless, nominal rates are typically used for the cost of debt, because total costs of issuance and sale of securities decrease the net proceeds from the sale. These costs are naturally small on public debt issues.

The risk-free rate used was the long-term Treasury bond rate of 9.5% while the debt rate premium was calculated by subtracting the long-term Treasury bond rate from the long-term “AA”

Monetary policy, ‘The government’s policy relating to the money supply, bank interest rates, and borrowing’ (Collin: 130), is another tool available to the government to control inflation. Figure 4 shows, that by increasing the interest rate (r), from r1 to r2, the supply of money (ms) is reduced from Q1

4.14 On January 1, 1994, the annual inflation rates in the U.S. and Italy were expected to be 4% and 7%, respectively. If the current spot rate on that day was $1 = L2,000, then the expected spot rate for the lira in three years was

between changes in inflation and in the output gap and also gives bank discretion over

Inflation persistence is an important issue for both monetary policy makers and theorists. However, there still exist some arguments that some model of pricing fail to explain the persistence. This paper summarizes two papers: inflation persistence by Jeff Fuhrer and George Moore and New Keynesian Economics and the Phillips Curve by John M. Roberts. We are going to follow the idea of Roberts (1995) and use the model in “Monetary Theory and Policy” second edition written by Carl E. Walsh. Section 1 gives the reason why inflation persistence is important. And also briefly introduce three different models that are summarized within the paper of Fuhrer and Moore (1995) and the book of Walsh. Section 2 introduces two kind of New Keynesian Phillips Curve deriving from Taylor (1980) model as well as Calvo (1983) model. Section 3 shows the Fuhrer and Moore’s (1995) inflation persistence model and can get the Hybrid Phillips curve. Section 4 compare Taylor model with Fuhrer and Moore’s model. And for the last section give the conclusion and comment on different three models.

Since the last century 90s, the past innovations in finance have made the money supply be calculated increasingly difficult as well as the relationship between the money supply and the inflation have also become more and more unstable so that the problem that the velocity of monetary is volatile appeared in the economy. That is why a number of central banks have already given up controlling the monetary aggregate so that they can achieve inflation targeting directly or indirectly. According to the Taylor rule, it has been argued (Bernanke and Woodford 1997) that the forecasting of the inflation rate has become quite important for the policy maker and the private sector. Finally, many scholars developed a new instrument in order to control the inflation and it is called the inflation forecast. Furthermore, this new technique is paid more attention especially in a few countries, which are, utilized the inflation targeting. Nowadays, decisions of the central bank begin to rely more and more on the future inflation rather than the past historical information and some central banks even regard the inflation forecast as an intermediate target of the monetary policy. Up to now, the mechanism of the inflation forecast has been adopted in over twenty countries in order to provide evidence for the policy formulation of the central bank. These countries include the developed country such as Australia, United kingdom, Canada and so on as well as the developing country for instance

Since π_t^e is not directly observable, a simplifying assumption that _t=π_(t-1)^e is applied, which means that the inflation rate expected that year is the inflation rate that prevailed in the previous year. The Phillips relationship given in equation (6) is known as the modified Phillips curve or the expectation-augmented Phillips curve.

Comparing the inflation level it can be seen that the inflationary bias is lower for positive values of

decreasing inflation since 1971, i.e. for the period where GDP deflator observations are available. The

Inflation is one of the most frequently used terms in economic discussions, yet the concept is variously misconstrued. There are various schools of thought on inflation, but there is a consensus among economists that inflation is a continuous rise in the prices. Simply put, inflation depicts an economist situation where there is a general rise in prices of goods and services, continuously. It could be defined as ‘a continue rise in prices as measured by an index such as the consumer price index (CPI) or by the implicit price deflator for Gross National Product (GNP). Inflation is frequently described as a state where “too much money is chasing too few goods”. When there is inflation, the currency losses purchasing power. The purchasing power of a given amount of naira (currency) will be smaller over time when there is inflation in the economy. For instance, assuming N10.00 (Nigeria unit currency) can purchase 10