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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 ...
Working Paper
Does state-dependent pricing imply coordination failure?
The analysis in Ball and Romer [1991] suggests that models with fixed costs of changing price may be rife with multiple equilibria; in their static model price adjustment is always characterized by strategic complementarity, a necessary condition for multiplicity. We extend Ball and Romer's analysis to a dynamic setting. In steady states of the dynamic model, we find only weak complementarity and no evidence of multiplicity, although nonexistence of symmetric steady state with pure strategies does arise in a small number of cases.
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 ...
Journal Article
Inflation targeting in a St. Louis model of the 21st century
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 ...
Discussion Paper
New tools to monitor inflation in real time
From 1995 through February 2020 – a period when inflation was relatively low and stable – the rate of monthly total Personal Consumption Expenditures (PCE) inflation was tightly related to a measure of asymmetry in the distribution of price changes of its subcomponents. We document that relationship and use it to construct an "inflation Filter" to distinguish inflation that is broad-based from that which is idiosyncratic (explained by price changes in a small share of subcomponents). Our "Inflation Filter" can be viewed as a standard diffusion index in which the threshold each month is ...
Journal Article
Housing and the Great Recession : a VAR accounting exercise
We use a vector autoregression (VAR) for the components of gross domestic product (GDP) to conduct some sectoral and temporal accounting for the current recession. It is obvious that housing played an important role in the current recession, but residential investment declined for two years before GDP declined. According to the VAR, the level of GDP in the second quarter of 2009---the trough of the decline in GDP---was close to but above the level implied by the estimated sequence of VAR innovations to residential investment over the period 2006:Q1--2009:Q2. Until late 2007 other offsetting ...
Journal Article
Inflation and changing expenditure shares
Briefing
A Small Contribution to Measuring the Lags in Monetary Policy Transmission
From May 2022 to July 2023, holdings of small CDs have risen from virtually nothing to more than $900 billion. While this is a dramatic increase, it has come on the heels of a sharp increase in interest rates, and the increase in CDs did not begin until well after interest rates started rising. In this article, I provide some historical perspective for the recent increase in CDs and retail money market mutual fund (MMMF) balances. What is the typical lag between market interest rate increases and increases in CD and MMMF balances? Is the recent increase unusually large, or does history ...
Working Paper
The pitfalls of monetary discretion
In a canonical staggered pricing model, monetary discretion leads to multiple private sector equilibria. The basis for multiplicity is a form of policy complementarity. Specifically, prices set in the current period embed expectations about future policy, and actual future policy responds to these same prices. For a range of values of the fundamental state variable ? a ratio of predetermined prices ? there is complementarity between actual and expected policy, and multiple equilibria occur. Moreover, this multiplicity is not associated with reputational considerations: it occurs in a ...