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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
Nominal frictions, relative price adjustment, and the limits to monetary policy
In simple sticky-price models, the guiding principle for optimal monetary policy is to stabilize nominal prices so as to eliminate the distortions associated with price adjustment. If there is only one sector, or one category of consumption goods, then stabilizing nominal prices means making the inflation rate zero. A growing subliterature on sticky prices considers optimal monetary policy when there are multiple sectors of sticky-price goods, broadly defined. If the relative prices of these goods need to move over time, then the principle just stated cannot be satisfied for all goods. Here I ...
Briefing
A Model-Based Perspective on Inflation and the Distribution of Relative Price Changes
A series of articles starting in 2022 has discussed the empirical relationship between inflation and the distribution of relative price changes: In the stable regime from 1995 until the pandemic era, the monthly inflation rate was closely related to a measure of asymmetry or skewness in the distribution of relative price changes. In this article, we describe related research that uses a dynamic macroeconomic model to study how inflation is jointly determined by monetary policy and "relative price shocks," as well as other shocks.1 We use that model to help us understand the factors that lead ...
Briefing
Relative Price Changes Are Unlikely to Account for Recent High Inflation
March 2021 marked the first month of the ongoing high inflation episode in the U.S. Last September, I analyzed the first five months of this episode through the lens of the distribution of price changes for all PCE components. A small fraction of expenditures accounted for much of the high inflation in those months. In this Economic Brief, I provide a related analysis and incorporate a new summary statistic for the distribution of relative price changes. In the last four months, high inflation has not been concentrated in a small fraction of expenditures, deviating from the relationship we ...
Working Paper
Real implications of the zero bound on nominal interest rates
If monetary policy succeeds in keeping average inflation very low, nominal interest rates may occasionally be constrained by the zero lower bound. The degree to which this constraint has real implications depends on the monetary policy feedback rule and the structure of price-setting. Policy rules that make the price level stationary lead to small real distortions from the zero bound. If policy imparts persistence into the inflation rate, the real implications of the zero bound are large in the presence of backward looking price-setting, and small if prices are set to maximize profits.
Journal Article
K-core inflation
K-core inflation is a new class of underlying inflation measures. The two most popular measures of underlying inflation are core inflation and trimmed mean inflation. The former removes fixed categories of goods and services (food and energy) from the inflation calculation, and the latter removes fixed percentiles of the weighted distribution of price changes. In contrast, k-core inflation specifies a size of relative price change to be removed from the inflation calculation. Thus, the categories and percentiles to be removed vary with each period?s distribution of relative price changes.
Journal Article
Zero inflation and the Friedman rule: a welfare comparison
Briefing
Detecting Inflation Instability
In a stable monetary policy regime, the share of relative price increases helps to explain monthly inflation fluctuations. We illustrate this regularity with U.S. data from January 1995 through February 2020, then we use it to evaluate whether the regime has remained stable during the pandemic period. From March 2021 to February 2022, the behavior of inflation and the share of relative price increases was inconsistent with the pre-pandemic regime. Recent data show some signs of a return to that regime.
Journal Article
Monetary policy and global equilibria in a production economy
In linear macroeconomic models, an active Taylor rule for monetary policy can guarantee a locally unique nonexplosive equilibrium. In a series of articles, Benhabib, Schmitt-Groh, and Uribe looked beyond the local dynamics and showed that active Taylor rules could interact with the zero bound on nominal interest rates to generate multiple equilibria, including a steady-state equilibrium with inflation below target. Recently, the persistence of low inflation and low nominal interest rates has brought attention to Benhabib, Schmitt-Groh, and Uribe's work in policy circles. We provide an ...