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Working Paper
A Theory of Sticky Rents: Search and Bargaining with Incomplete Information
The housing rental market offers a unique laboratory for studying price stickiness. This paper is motivated by two facts: 1. Tenants? rents are remarkably sticky even though regular and expected recontracting would, by itself, suggest substantial rent flexibility. 2. Rent stickiness varies significantly across structure type; for example, detached unit rents are far stickier than large apartment unit rents. We offer the first theoretical explanation of rent stickiness that is consistent with these facts. In this theory, search and bargaining with incomplete information generates stickiness in ...
Journal Article
How Much Slack Is in the Labor Market? That Depends on What You Mean by Slack
Estimates of labor market slack can diverge a great deal depending on how slack is defined. We calculate slack using five different concepts that all focus on a single labor market indicator, the unemployment rate. We show that the estimates all provide useful?but different?information. We argue that choosing the best measure of slack depends on the question being asked. If the question is, ?Has the unemployment rate reached its longer-run normal level?? then our answer is, ?Almost.? But significant uncertainty surrounds the estimates; and others may wish to consider additional labor market ...
Working Paper
Variation in the Phillips Curve Relation across Three Phases of the Business Cycle
We use recently developed econometric tools to demonstrate that the Phillips curve unemployment rate?inflation rate relationship varies in an economically meaningful way across three phases of the business cycle. The first (?bust phase?) relationship is the one highlighted by Stock and Watson (2010): A sharp reduction in inflation occurs as the unemployment rate is rising rapidly. The second (?recovery phase?) relationship occurs as the unemployment rate subsequently begins to fall; during this phase, inflation is unrelated to any conventional unemployment gap. The final (?overheating phase?) ...
Working Paper
All Fluctuations Are Not Created Equal: The Differential Roles of Transitory versus Persistent Changes in Driving Historical Monetary Policy
The historical analysis of FOMC behavior using estimated simple policy rules requires the specification of either an estimated natural rate of unemployment or an output gap. But in the 1970s, neither output gap nor natural rate estimates appear to guide FOMC deliberations. This paper uses the data to identify the particular implicit unemployment rate gap (if any) that is consistent with FOMC behavior. While its ability appears to have improved over time, our results indicate that, both before the Volcker period and through the Bernanke period, the FOMC distinguished persistent movements in ...
Working Paper
Is It Time to Reassess the Focal Role of Core PCE Inflation?
In this paper, I review the history of “core” PCE inflation and its rationale: remove volatile items with transitory shocks to better highlight the trend in inflation. Structural changes in the inflation process imply that, on a “reducing volatility” basis, the list of items excluded from the “core” inflation basket (aside from gasoline) is far from optimal. This is true whether one assesses volatility on the basis of a weighted component monthly, or an index monthly, or a 12-month index, or a 5-year index. In addition, I demonstrate other deficiencies of exclusion indexes. ...
Working Paper
Late Payment Fees and Nonpayment in Rental Markets, and Implications for Inflation Measurement: Theoretical Considerations and Evidence
tatistical agencies track rental expenditures for use in the national accounts and in consumer price indexes (CPIs). As such, statistical agencies should include late payment fees and nonpayment in rent. In the US context, late payment fees are excluded from the CPI. Ostensibly, nonpayment of rent is included in the US CPI; but its treatment is deficient, and we demonstrate that small variations in nonpayment could lead to large swings in shelter inflation, and might have played a role in the 2009 measured shelter inflation collapse. They didn’t: while the national nonpayment incidence is ...
Journal Article
Behavior of a New Median PCE Measure: A Tale of Tails
We introduce two new measures of trend inflation, a median PCE inflation rate and a median PCE excluding OER inflation rate, and investigate their performance. Our analysis indicates that both perform comparably to other simple trend inflation estimators such as the trimmed-mean PCE. Furthermore, we find that the performance of the median PCE is related to skewness in the distribution of cross-sectional growth rates across categories in the PCE, and our results suggest that the Bowley skewness statistic may be useful in forecasting.
Journal Article
Whose Inflation Expectations Best Predict Inflation?
We examine the predictive relationship between various measures of inflation expectations and future inflation. We find that the expectations of professional economists and of businesses have tended to provide more accurate predictions of future inflation than the expectations of households and of financial market participants. However, the forecasts coming from a relatively simple and popular benchmark inflation forecasting model have historically been roughly as accurate as the expectations of businesses and professional economists.
Journal Article
Digging into the Downward Trend in Consumer Inflation Expectations
Since mid-2014, the long-run inflation expectations of consumers have been declining. Many commentators blame the decline on gasoline prices, which have also been falling since that time, but we argue that this explanation is incomplete. We analyze University of Michigan Surveys of Consumers microdata and find that a decline in uncertainty about future inflation is a modest part of the story over this period?but it represents the entire story when considering changes in expectations since 2012.
Journal Article
Adjusting Median and Trimmed-Mean Inflation Rates for Bias Based on Skewness
Median and trimmed-mean inflation rates tend to be useful estimates of trend inflation over long periods, but they can exhibit persistent departures from the underlying trend over shorter horizons. In this Commentary, we document that the extent of this bias is related to the degree of skewness in the distribution of price changes. The shift in the skewness of the cross-sectional price-change distribution during the pandemic means that median PCE and trimmed-mean PCE inflation rates have recently been understating the trend in PCE inflation by about 15 and 35 basis points, respectively.