Search Results
Working Paper
Nonlinear Inflation Dynamics in Menu Cost Economies
Existing menu cost models, when parameterized to match the micro-price data, cannot reproduce the extent to which the fraction of price changes increases with inflation. In addition, in the presence of strategic complementarities, they predict implausibly large menu costs and misallocation. We resolve these shortcomings using a multi-product menu cost model that features two key ingredients. First, the products sold by a firm are imperfect substitutes. Second, strategic complementarities are at the firm, not product level. In contrast to existing models, the fraction of price changes ...
Working Paper
The Inflation Accelerator
We develop a tractable sticky price model in which the fraction of price changes evolves endogenously over time and, consistent with the evidence, increases with inflation. Because we assume that firms sell multiple products and choose how many, but not which, prices to adjust in any given period, our model admits exact aggregation and reduces to a one-equation extension of the Calvo model. This additional equation determines the fraction of price changes. The model features a powerful inflation accelerator—a feedback loop between inflation and the fraction of price changes—that ...
Conference Paper
On implications of micro price data for macro models - comments
The author discusses: the challenges the wealth of micro-data has posed to macroeconomists and some of the progress made to address these; the fact that an important number of price changes in the data are temporary discounts (sales); and the complicated mapping from the frequency of price adjustment to the degree of monetary non-neutrality in economies that explicitly model price stickiness as arising from menu costs.
Working Paper
Asset Prices and Unemployment Fluctuations
Recent critiques have demonstrated that existing attempts to account for the unemployment volatility puzzle of search models are inconsistent with the procylicality of the opportunity cost of employment, the cyclicality of wages, and the volatility of risk-free rates. We propose a model that is immune to these critiques and solves this puzzle by allowing for preferences that generate time-varying risk over the cycle, and so account for observed asset pricing fluctuations, and for human capital accumulation on the job, consistent with existing estimates of returns to labor market experience. ...
Working Paper
On the Importance of Household versus Firm Credit Frictions in the Great Recession
Although a credit tightening is commonly recognized as a key determinant of the Great Recession, to date, it is unclear whether a worsening of credit conditions faced by households or by firms was most responsible for the downturn. Some studies have suggested that the household-side credit channel is quantitatively the most important one. Many others contend that the firm-side channel played a crucial role. We propose a model in which both channels are present and explicitly formalized. Our analysis indicates that the household-side credit channel is quantitatively more relevant than the ...
Working Paper
Inventories, Lumpy Trade, and Large Devaluations
Fixed transaction costs and delivery lags are important costs of international trade. These costs lead firms to import infrequently and hold substantially larger inventories of imported goods than domestic goods. Using multiple sources of data, we document these facts. We then show that a parsimoniously parameterized model economy with importers facing an (S, s)-type inventory management problem successfully accounts for these features of the data. Moreover, the model can account for import and import price dynamics in the aftermath of large devaluations. In particular, desired inventory ...
Working Paper
Nonlinear Inflation Dynamics in Menu Cost Economies
Canonical menu cost models, when parameterized to match the micro-price data, cannot reproduce the extent to which the fraction of price changes increases with inflation. They also predict implausibly large menu costs and misallocation in the presence of strategic complementarities. We resolve these shortcomings by extending the multiproduct menu cost model along two dimensions. First, the products sold by a firm are imperfect substitutes. Second, strategic complementarities are at the firm, not product level. In contrast to standard models, the fraction of price changes increases rapidly ...
Working Paper
The Inflation Accelerator
We develop a tractable sticky price model in which the fraction of price changesevolves endogenously over time and, consistent with the evidence, increases with inflation. Because we assume that firms sell multiple products and choose how many, but not which, prices to adjust in any given period, our model admits exact aggregation and reduces to a one-equation extension of the Calvo model. This additional equation determines the fraction of price changes. The model features a powerful inflation accelerator – a feedback loop between inflation and the fraction of price changes – which ...
Working Paper
Nonlinear Dynamics in Menu Cost Economies? Evidence from U.S. Data
We show that standard menu cost models cannot simultaneously reproduce the dispersion in the size of micro-price changes and the extent to which the fraction of price changes increases with inflation in the U.S. time-series. Though the Golosov and Lucas (2007) model generates fluctuations in the fraction of price changes, it predicts too little dispersion in the size of price changes and therefore little monetary nonneutrality. In contrast, versions of the model that reproduce the dispersion in the size of price changes and generate stronger monetary non-neutrality predict a nearly constant ...
Working Paper
Inventories, lumpy trade, and large devaluations
Fixed transaction costs and delivery lags are important costs of international trade. These costs lead firms to import infrequently and hold substantially larger inventories of imported goods than domestic goods. Using multiple sources of data, we document these facts. We then show that a parsimoniously parameterized model economy with importers facing an (S, s)-type inventory management problem successfully accounts for these features of the data. Moreover, the model can account for import and import price dynamics in the aftermath of large devaluations. In particular, desired inventory ...