The Roles of Price Points and Menu Costs in Price Rigidity
Macroeconomic models often generate nominal price rigidity via menu costs. This paper provides empirical evidence that treating menu costs as a structural explanation for sticky prices may be spurious. Using scanner data, I note two empirical facts: (1) price points, embodied in nine-ending prices, account for approximately two-thirds of prices; and (2) at the conclusion of sales, post-sale prices return to their pre-sale levels more than three-fourths of the time. I construct a model that nests roles for menu costs and price points and estimate model variants. Excluding the two facts yields ...
What drives consumer debt dynamics?
Consumers generally have been reducing their debt levels in the wake of the housing bust, and many policymakers and economists have pointed to this deleveraging as an important drag on the recovery from the recession. ; A key driving factor has been the sharp decline in the number of consumers taking on additional debt. With fewer borrowers taking advantage of low interest rates to take on debt and expand spending, accommodative monetary policy is less effective than in normal times. ; But Knotek and Braxton find that a modest rebound is now under way in the number of consumers increasing ...
Inflation: Drivers and Dynamics 2019 Conference Summary
To provide insights into the processes that drive inflationary dynamics, the Federal Reserve Bank of Cleveland holdsan annual conference on the topic of inflation: “Inflation: Drivers and Dynamics.” This Commentary summarizes thepapers presented at the 2019 conference.
Regime changes and monetary stagflation
This paper examines whether monetary shocks can consistently generate stagflation in a dynamic, stochastic setting. I assume that the monetary authority can induce transitory shocks and longer-lasting monetary regime changes in its operating instrument. Firms cannot distinguish between these shocks and must learn about them using a signal extraction problem. The possibility of changes in the monetary regime greatly improves the ability of money to generate stagflation. This is true whether the regime actually changes or not. If the monetary regime changes on average once every ten years, ...
Alternative methods of solving state-dependent pricing models
We use simulation-based techniques to compare and contrast two methods for solving state-dependent pricing models: discretization, which solves and simulates the model on a grid; and collocation, which relies on Chebyshev polynomials. While both methods produce qualitatively similar results, statistically significant quantitative differences do arise. We present evidence favoring discretization over collocation in this context, given a lack of robustness in the latter.
Consumers and COVID-19: A Real-Time Survey
We summarize the results from an ongoing survey that asks consumers questions related to the recent coronavirus outbreak, including their expectations for how the economy is likely to be affected by the outbreak and how their own behavior has changed in response to it. The survey began in early March, providing a window into how consumers’ responses have evolved in real time since the early days of the acknowledged spread of COVID-19 in the United States. In updating and charting the survey’s findings on the Cleveland Fed’s website going forward, we seek to inform policymakers and ...
How do households respond to uncertainty shocks?
Economic disruptions generally coincide with heightened uncertainty. In the United States, uncertainty increased sharply with the recent housing market crash, financial crisis, deep recession, and uneven recovery. In July 2010 Congressional testimony, Federal Reserve Chairman Bernanke described conditions as "unusually uncertain." The uncertain landscape was also cited as a factor in the slow recovery from the 2001 recession, when the March 2003 Federal Open Market Committee statement highlighted the "unusually large uncertainties" at the time. ; Uncertainty is a standard feature of most ...
Real-Time Density Nowcasts of US Inflation: A Model-Combination Approach
We develop a flexible modeling framework to produce density nowcasts for US inflation at a trading-day frequency. Our framework: (1) combines individual density nowcasts from three classes of parsimonious mixed-frequency models; (2) adopts a novel flexible treatment in the use of the aggregation function; and (3) permits dynamic model averaging via the use of weights that are updated based on learning from past performance. Together these features provide density nowcasts that can accommodate non-Gaussian properties. We document the competitive properties of the nowcasts generated from our ...
Federal Funds Rates Based on Seven Simple Monetary Policy Rules
Monetary policymakers often use simple monetary policy rules, like the Taylor rule, as an input into their decision-making. However, there are many different simple rules, and there is no agreement on a single ?best? rule. We look at the federal funds rates coming from seven simple rules and three economic forecasts to investigate the range of results that can be produced. While there are some commonalities, we document that the differences in the federal funds rates suggested by the rules can be quite pronounced.
Changing Policy Rule Parameters Implied by the Median SEP Paths
This Commentary estimates the implied parameters of simple monetary policy rules using the median paths for the federal funds rate and other economic variables provided in the Federal Open Market Committee?s Summary of Economic Projections (SEP). The implied policy rule parameters appear to have changed over time, as the federal funds rate projections have become less responsive to the unemployment gap. This finding could reflect changes in policymakers? preferences, uncertainty over other aspects of the policy rule, or limitations of estimating simple monetary policy rules from the median ...