A more careful analysis of this practice shows that the primary risk of such practice is to overpay in the contract currency, if the underlying inflation rates
are based on softer currencies, yet those rates are applied to a hard contract currency.
We find substantial variation in serial correlation of underlying inflation rates and we find this variation is positively related to the increase in correlations as data are averaged over longer periods.
We show that serial correlation in the underlying inflation rate ties these two observations together and explains them.
In this section, we provide an explanation based on variation of the underlying inflation rate relative to the demand for money.
In this section, we derive testable predictions concerning the evolution of the underlying inflation rate and the correlation of excess money growth and inflation.
Consistent with the argument above, suppose that errors in the demand for money are serially uncorrelated but suppose that the underlying inflation rate, or inflation target, evolves over time according to
The parameter [beta] represents the serial correlation in the underlying inflation rate. Increases in [beta] increase the difference between the one-period and two-period correlations.
Underlying inflation rates
will continue to decline towards zero
While I'm not doubting the truth of your figures, it might be less depressing to compare the underlying inflation rates
with those of our European partners.
No such pressures could be identified in Canada, while in the United Kingdom, underlying inflation rates
have settled into a range around 2%.
(16) Thus measured, the underlying inflation rate in the NIER growth forecast would be 1.7 percent in 2002 (2 - 0.3), 1.5 percent in 2003 (2 - 0.5), and 1.7 percent in 2004 (2 - 0.3) - see Diagram 116.
To judge from the inflationary effects in the alternative scenarios, it is relatively unlikely that the current outlook for growth (no matter whether developments follow the NIER or the Riksbank forecast) would lead to an underlying inflation rate above 2 percent.