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Working Paper
Public and private values
This paper experimentally examines whether looking at other people's pricing decisions is a type of heuristic - a decisionmaking rule - that people use even when it is not applicable, as in the case of clearly private value goods. We find evidence that this is indeed the case - an individual's valuation of a purely subjective experience under full information, elicited using an incentive compatible mechanism, is highly influence by valuations made by others. This result can shed light on price behavior, price rigidities, and rents.
Journal Article
Inflation: Drivers and Dynamics | 2019 CEBRA Annual Meeting Session Summary
The relationship between the Phillips curve and inflation has become weaker over time, producing questions regarding how policymakers might connect inflation to the rest of the economy. Presentations given during the “Inflation: Drivers and Dynamics” session of the Central Bank Research Association’s annual meeting focused on the intersection of monetary policy and inflation dynamics to examine the ways in which policy might impact inflation and related expectations and processes. This Economic Commentary summarizes the papers presented during this session.
Journal Article
The Long-Run Costs of Higher Inflation
This Economic Commentary provides an overview of several frictions and the channels through which they affect economic welfare under elevated trend inflation above 2 percent. These frictions, associated with financial transactions, price and wage stickiness, and cognitive limitations, suggest that inflation imposes significant costs on society. Higher inflation may lead to a steeper Phillips curve, a situation which increases the volatility of inflation and interest rates.
Working Paper
A Behavioral Foundation for the Investment Wedge
Motivated by behavioral evidence, we develop a tractable method for incorporating competition neglect into a general equilibrium firm investment problem. Competition neglect causes firms to systematically underestimate the investment of their competitors. When we introduce competition neglect into a canonical RBC model, this friction acts like an investment wedge that causes over-investment at first, and under-investment later on. In contrast to a model with exogenous investment shocks, these dynamics are accompanied by a realistic variation in equity premia, even in the absence of financial ...
Working Paper
Raising the Inflation Target: How Much Extra Room Does It Really Give?
Some, but less than intended. The reason is a shift in the behavior of the private sector: Prices adjust more frequently, lowering the potency of monetary policy. We quantitatively investigate this channel across different models, based on a calibration using micro data. By raising the target from 2 percent to 4 percent, the monetary authority gets only between 0.51 and 1.60 percentage points of effective extra policy room for monetary policy (not 2 percentage points as intended). Getting 2 percentage points of effective extra room requires raising the target to more than 4 percent. Taking ...
Working Paper
Can Supply Shocks Be Inflationary with a Flat Phillips Curve?
Not in standard models. With conventional pricing frictions, imposing a flat Phillips curve also imposes a price level that is rigid with respect to supply shocks. In the New Keynesian model, price markup shocks need to be several orders of magnitude bigger than other shocks in order to fit the data, leading to unreasonable assessments of the magnitude of the increase in costs during inflationary episodes. To account for the facts, we propose a strategic microfoundation of shock-dependent price stickiness: prices are sticky with respect to demand shocks but flexible with respect to supply ...