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Working Paper
Inflation and real activity with firm-level productivity shocks
In the last ten years there has been an explosion of empirical work examining price setting behavior at the micro level. The work has in turn challenged existing macro models that attempt to explain monetary nonneutrality, because these models are generally at odds with much of the micro price data. In response, economists have developed a second generation of sticky-price models that are state dependent and that include both fixed costs of price adjustment and idiosyncratic shocks. Nonetheless, some ambiguity remains about the extent of monetary nonneutrality that can be attributed to costly ...
Journal Article
Inflation targeting in a St. Louis model of the 21st century
Journal Article
Reexamining the monetarist critique of interest rate rules
Monetarist economists argued long ago that central bank interest rate rules exacerbate macroeconomic fluctuations, essentially by not allowing the interest rate to respond promptly to shifts in the supply and demand for loans. To support this critique, they pointed to the procyclicality of the money stock. Yet, when there are real shocks and a real business cycle, modern macroeconomic models imply that some procyclicality of money is desirable, to stabilize the price level. A simple interest rate rule illustrates that the monetarist critique can be valid within this model, since the rule ...
Working Paper
Pricing, production, and persistence.
Though built with increasingly precise microfoundations, modern optimizing sticky price models have displayed a chronic inability to generate large and persistent real responses to monetary shocks, as recently stressed by Chari, Kehoe, and McGrattan [2000]. This is an ironic finding, since Taylor [1980] and other researchers were motivated to study sticky price models in part by the objective of generating large and persistent business fluctuations. ; The authors trace this lack of persistence to a standard view of the cyclical behavior of real marginal cost built into current sticky price ...
Working Paper
The case for price stability
Reasoning within the New Neoclassical Synthesis (NNS) we previously recommended that price stability should be the primary objective of monetary policy. We called this a neutral policy because it keeps output at its potential, defined as the outcome of an imperfectly competitive real business cycle model with a constant markup of price over marginal cost. We explore the foundations of neutral policy more fully in this paper. Using the principles of public finance, we derive conditions under which markup constancy is optimal monetary policy. ; Price stability as the primary policy objective ...
Working Paper
The pitfalls of monetary discretion
In a canonical staggered pricing model, monetary discretion leads to multiple private sector equilibria. The basis for multiplicity is a form of policy complementarity. Specifically, prices set in the current period embed expectations about future policy, and actual future policy responds to these same prices. For a range of values of the fundamental state variable ? a ratio of predetermined prices ? there is complementarity between actual and expected policy, and multiple equilibria occur. Moreover, this multiplicity is not associated with reputational considerations: it occurs in a ...
Journal Article
Quantitative theory and econometrics
Working Paper
Financial deregulation, monetary policy, and central banking
The paper presents the results of research conducted as part of the American Enterprise Institute's project on financial services regulation. It is a revision of a paper that later appeared in a volume providing a comprehensive review of financial regulatory policy entitled, Restructuring Banking and Financial Services in America. Research support from the American Enterprise Institute and National Science Foundation is acknowledged. However, the views are solely those of the authors and should not be attributed to either of the preceding institutions. ; A version of this work was published ...
Working Paper
A note on the neutrality of temporary monetary disturbances
In the classical macroeconomic models constructed by Lucas (1972, 1975) and Barro (1976), monetary aggregates are assumed to be generated by a logarithmic random walk. This specification implies that all monetary growth is (a) unanticipated and (b) permanent.