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Working Paper
Discretionary monetary policy in the Calvo model
We study discretionary equilibrium in the Calvo pricing model for a monetary authority that chooses the money supply. The steady-state inflation rate is above 8 percent for a baseline calibration, but it varies substantially with alternative structural parameter values. If the initial condition involves inflation higher than steady state, discretionary policy generates an immediate drop in inflation followed by a gradual increase to the steady state. Unlike the two-period Taylor model, discretionary policy in the Calvo model does not accommodate predetermined prices in a way that inevitably ...
Working Paper
Monetary Policy and Macroeconomic Stability Revisited
A large literature has established that the Fed? change from a passive to an active policy response to inflation led to US macroeconomic stability after the Great Inflation of the 1970s. This paper revisits the literature?s view by estimating a generalized New Keynesian model using a full-information Bayesian method that allows for equilibrium indeterminacy and adopts a sequential Monte Carlo algorithm. The model empirically outperforms canonical New Keynesian models that confirm the literature?s view. Our estimated model shows an active policy response to inflation even during the Great ...
Working Paper
Kinked demand curves, the natural rate hypothesis, and macroeconomic stability
In the presence of staggered price setting, high trend inflation induces a large deviation of steady-state output from its natural rate and indeterminacy of equilibrium under the Taylor rule. This paper examines the implications of a ''smoothed-off'' kink in demand curves for the natural rate hypothesis and macroeconomic stability using a canonical model with staggered price setting, and sheds light on the relationship between the hypothesis and the Taylor principle. An empirically plausible calibration of the model shows that the kink in demand curves mitigates the influence of price ...
Journal Article
Why Has Inflation Persistence Declined?
Working Paper
Price Dispersion and Inflation Persistence
Persistent responses of inflation to monetary policy shocks have been difficult to explain by existing models of the monetary transmission mechanism without embedding controversial intrinsic inertia of inflation. Our paper addresses this issue using a staggered price model with trend inflation, a smoothed-off kink in demand curves, and a fixed cost of production. In this model, inflation exhibits a persistent response to a policy shock even in the absence of its intrinsic inertia, because the kink causes a measure of price dispersion, which is intrinsically inertial, to become a key source of ...
Working Paper
A Theory of Intrinsic Inflation Persistence
We propose a novel theory of intrinsic inflation persistence by introducing trend inflation and variable elasticity of demand in a model with staggered price and wage setting. Under nonzero trend inflation, the variable elasticity generates intrinsic persistence in inflation through a measure of price dispersion stemming from staggered price setting. It also introduces intrinsic persistence in wage inflation under staggered wage setting, which affects price inflation. With the theory we show that inflation exhibits a persistent, hump-shaped response to a monetary policy shock. We also show ...
Journal Article
Why have the dynamics of labor productivity changed?
The strength of the nascent economic recovery--and of the labor market--will depend importantly on labor productivity. By itself, faster productivity growth contributes to faster output growth. At the same time, stronger productivity gains allow firms to increase output without adding workers. Some analysts believe that faster productivity growth contributed to the ?jobless recoveries? after the 1990-91 and 2001 recessions. ; In recent years, the U.S. economy has undergone a change in the behavior of productivity over the business cycle. Until the mid-1980s, productivity growth rose and fell ...
Working Paper
Monetary Policy and Macroeconomic Stability Revisited
A large literature with canonical New Keynesian models has established that the Fed's policy change from a passive to an active response to inflation led to U.S. macroeconomic stability after the Great Inflation of the 1970s. We revisit this view by estimating a staggered price model with trend inflation using a Bayesian method that allows for equilibrium indeterminacy and adopts a sequential Monte Carlo algorithm. {{p}} The model empirically outperforms a canonical New Keynesian model and demonstrates an active response to inflation even in the Great Inflation era, during which the U.S. ...
Journal Article
Interpreting the recent decline in labor force participation
At the turn of the 21st century, labor force participation in the United States reversed its decades-long increase and started trending lower. In the four years since the start of the recent recession, the labor force participation rate experienced a far bigger drop than in any previous four-year period. ; To disentangle the roles of long-term trend factors?such as demographic shifts?and the recession in the recent drop in participation, Van Zandweghe examines a variety of evidence, including data on demographic shifts, labor market flows, gender differences, and the effects of long-term ...
Working Paper
Labor market search, the Taylor principle, and indeterminacy
In a sticky-price model with labor market search and matching frictions, forecast-based interestrate policy almost always induces indeterminacy when it is strictly inflation targeting and satisfies the Taylor principle. Indeterminacy is due to a vacancy channel of monetary policy that makes inflation expectations self-fulfilling. The effect of this channel strengthens as the sluggishness of the adjustment of employment relative to that of consumption increases. When this relative sluggishness is high, the Taylor principle fails to ensure determinacy, regardless of whether the policy is ...