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Working Paper
Pricing decisions in an experimental dynamic stochastic general equilibrium economy
We construct experimental economies, populated with human subjects, with a structure based on a nonlinear version of the New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model. We analyze the behavior of firms' pricing decisions in four different experimental economies. We consider how well the experimental data conform to a number of accepted empirical stylized facts. Pricing patterns mostly conform to these patterns. Most price changes are positive, and inflation is strongly correlated with average magnitude, but not the frequency, of price changes. Prices are affected negatively ...
Working Paper
Inflation and Deflationary Biases in Inflation Expectations
We explore the consequences of losing confidence in the price-stability objective of central banks by quantifying the inflation and deflationary biases in inflation expectations. In a model with an occasionally binding zero-lower-bound constraint, we show that an inflation bias as well as a deflationary bias exist as a steady-state outcome. We assess the predictions of this model using unique individual-level inflation expectations data across nine countries that allow for a direct identification of these biases. Both inflation and deflationary biases are present (and sizable) in inflation ...
Working Paper
The Multiplier Effect of Education Expenditure
This paper examines the short-run effects of federal education expenditures on local income. We exploit city-level variation in exposure to national changes in the $30-billion Federal Pell Grant Program, which is the largest program to help low-income students attend college in the U.S., to calculate fiscal multipliers of education expenditures. An increase in Pell grants by 1 percent of a city's income raises local income by 2.4 percent over the next two years. This multiplier effect is larger than estimates for military spending (1.5 on average). Multipliers are higher when grants are ...
Working Paper
Latent Variables Analysis in Structural Models: A New Decomposition of the Kalman Smoother
This paper advocates chaining the decomposition of shocks into contributions from forecast errors to the shock decomposition of the latent vector to better understand model inference about latent variables. Such a double decomposition allows us to gauge the inuence of data on latent variables, like the data decomposition. However, by taking into account the transmission mechanisms of each type of shock, we can highlight the economic structure underlying the relationship between the data and the latent variables. We demonstrate the usefulness of this approach by detailing the role of ...
Working Paper
Consumers' Attitudes and Their Inflation Expectations
This paper studies consumers' inflation expectations using micro-level data from the Surveys of Consumers conducted by University of Michigan. It shows that beyond the well-established socio-economic factors such as income, age or gender, other characteristics such as the households' financial situation and their purchasing attitudes are important determinants of their forecast accuracy. Respondents with current or expected financial difficulties, pessimistic attitudes about major purchases, or expectations that income will go down in the future have a stronger upward bias in their ...
Working Paper
Households' Preferences Over Inflation and Monetary Policy Tradeoffs
We document novel facts about U.S. household preferences over inflation and monetary policy. Many households are highly attentive to news about monetary policy and to interest rates. The median household perceives the Federal Reserve's inflation target to be three percent, but would prefer it to be lower. Quantifying the tradeoff between inflation and unemployment, we find an average acceptable sacrifice ratio of 0.6, implying that households are likely to find disinflation costly. Average preferences are well represented by a non-linear loss function with near equal weights on inflation and ...
Working Paper
Endogenous Labor Supply in an Estimated New-Keynesian Model: Nominal versus Real Rigidities
Standard macroeconomic models find it difficult to reconcile slow recoveries and missing disinflations after deep deteriorations in the labor market. We develop and estimate a New-Keynesian model with search and matching frictions in the labor market, endogenous intensive and extensive labor supply decisions, and financial frictions. We conclude that the estimated combination of a low degree of nominal wage rigidities and a high degree of real wage rigidities, together with a small role for pre-match costs relative to post-match costs, is key in successfully forecasting slow recoveries in ...
Working Paper
The Hidden Heterogeneity of Inflation Expectations and its Implications
Using a new consumer survey dataset, we document a new dimension of heterogeneity in inflation expectations that has implications for consumption and saving decisions as well as monetary policy transmission. We show that German households with the same inflation expectations differently assess whether the level of expected inflation and of nominal interest rates is appropriate or too high/too low. The `hidden heterogeneity' in expectations stemming from these opinions is related to demographic characteristics and affects current and planned spending in addition to the Euler equation effect of ...