price setting during low and high inflation evidence from mexico this paper provides new insight into the relationship between inflation and the setting of individual prices by examining a large data set of mexican consumer prices covering episodes of both low and high inflation when the annual rate of inflation is low below 10 15 the frequency of price changes comoves weakly with inflation because movements in the frequency of price decreases and increases partly offset each other in contrast the average magnitude of price changes correlates strongly with inflation because it is sensitive to movements in the relative shares of price increases and decreases when inflation rises beyond 10 15 few price decreases are observed and both the frequency and average magnitude are important determinants of inflation i show that a menu cost model with idiosyncratic technology shocks predicts the average frequency and magnitude of price changes well over a range of inflation similar to that experienced by mexico

the inexorable and mysterious tradeoff between inflation and unemployment this paper discusses the short run tradeoff between inflation and unemployment although this tradeoff remains a necessary building block of business cycle theory economists have yet to provide a completely satisfactory explanation for it according to the consensus view among central bankers and monetary economists a contractionary monetary shock raises unemployment at least temporarily and leads to a delayed and gradual fall in inflation standard dynamic models of price adjustment however cannot explain this pattern of responses reconciling the consensus view about the effects of monetary policy with models of price adjustment remains an outstanding puzzle for business cycle theorists several years ago i gave myself a peculiar assignment i decided to try to summarise all of economics in ten simply stated principles the purpose of this task was to introduce students to the economic way of thinking in the first chapter of my textbook principles of economics i figured if god could boil all of moral philosophy down to ten commandments i should be able to do much the same with economic science most of the ten principles i chose were microeconomic and hard to argue with they involved the importance of tradeoffs marginal analysis the benefits of trade market efficiency market failure and so on i allocated the last three principles to macroeconomics the first of these was a country s standard of living depends on its ability to produce goods and services which i viewed as the foundation of all growth theory the second was prices rise when the government prints too much money which i took to be the essence of classical monetary theory the last of my ten principles is the subject of today s lecture society faces a short run tradeoff between inflation and unemployment perhaps not surprisingly this statement turned out to be controversial when my publisher sent out the manuscript for review a few readers objected

the propagation of monetary policy shocks in a heterogeneous production economy abstract realistic heterogeneity in price rigidity interacts with heterogeneity in sectoral size and input output linkages in the transmission of monetary policy shocks quantitatively heterogeneity in price stickiness is the central driver for real effects input output linkages and consumption shares alter the identity of the most important sectors to the transmission reducing the number of sectors decreases monetary non neutrality with a similar impact response of inflation hence the initial response of inflation to monetary shocks is not sufficient to discriminate across models and ignoring heterogeneous consumption shares and input output linkages identifies the wrong sectors from which the real effects originate

limited liability and incentive contracting with ex ante action choices abstract this article examines a principal agent model of financial contracting in which a risk neutral entrepreneur agent makes an unobservable ex ante effort choice while employing the investment funds of a risk neutral investor principal the key innovation is that the investment contract is subject to statutory liability limits given these liability limits two settings are considered one in which the investor payoff function is also constrained to be monotonically nondecreasing in firm profit and another in which no such monotonic contract constraint is imposed in the former case a standard debt contract is shown to emerge and a first best effort choice is not achieved in the latter setting the optimum is characterized by a live or die payoff function and a first best effort level may or may not be realized

real rigidities and the non neutrality of money rigidities in real prices are not sufficient to create rigidities in nominal prices and real effects of nominal shocks and by themselves small frictions in nominal adjustment such as costs of changing prices create only small non neutralities but this paper shows that substantial nominal rigidity can arise from a combination of real rigidities and small nominal frictions the paper shows the connection between real and nominal rigidity given the presence of nominal frictions both in general and for two specific sources of real rigidity one arising from goods market imperfections and the other from labour market imperfections

monetary shocks in models with inattentive producers we study models where prices respond slowly to shocks because firms are rationally inattentive producers must pay a cost to observe the determinants of the current profit maximizing price and hence observe them infrequently to generate large real effects of monetary shocks in such a model the time between observations must be long and or highly volatile previous work on rational inattentiveness has allowed for observation intervals that are either constant but long e g caballero 1989 or reis 2006 or volatile but short e g reis s 2006 example where observation costs are negligible but not both in these models the real effects of monetary policy are small for realistic values of the duration between observations we show that non negligible observation costs produce both of these effects intervals between observations are infrequent and volatile this generates large real effects of monetary policy for realistic values of the average time between observations

price and wage inflation persistence across countries and monetary regimes abstract we augmented a macro model with intrinsic inflation inertia assuming that prices farer in the past are more likely to be reset we estimated the model for seven industrialized economies to compare their price wage structures and to explore the potential nexus between changes the price wage structure and changes in policy stances we find evidence for duration dependent price adjustments in all the country of the sample although positively sloped after few periods price hazard functions often become flat as in calvo based models instead wage hazard shapes are in line with taylor contracts with the exceptions of france and the united kingdom country comparison shows that price and wage stickiness are correlated regarding monetary policy stances no systematic effect is found observed changes are explained by country specific factors e g market reforms

empirical evidence on inflation expectations in the new keynesian phillips curve abstract we review the main identification strategies and empirical evidence on the role of expectations in the new keynesian phillips curve paying particular attention to the issue of weak identi

analytical approximations in models of hysteresis decisions made under ongoing uncertainty and costly reversibility entail a range of the state variable where inaction is optimal which in turn produces hysteresis permanent effects of temporary shifts the range is usually defined by non linear equations that need numerical solutions in this paper a technique of analytical approximations is developed and applied to two models menu costs and investment the resulting explicit solutions help clarify why hysteresis is important even for small irreversibility in the menu cost model hysteresis is two orders of magnitude larger than under the akerlof yellen or mankiw assumptions when decisions that are costly to reverse are made under conditions of ongoing uncertainty the optimum policy usually entails a range of inertia the action should be taken only when the value of the underlying state variable becomes especially favourable and reversed only when it becomes especially unfavourable there is an intermediate range over which inaction is optimal this in turn gives rise to hysteresis starting from a value in the range of inertia if the state variable crosses the action trigger point and then returns to its original level the action will be taken but not reversed thus a temporary change will leave a permanent effect numerical solutions for models of irreversible investment show that the range of inaction is remarkably large even when the cost of reversal is small see brennan and schwartz 1985 constantinides 1986 and dixit 1989a b for examples of this unfortunately the equations tlhat determine the optimum policy are highly non linear they do not have analytical solutions therefore we lack a clearer and more general understanding of why hysteresis is numerically so important in this paper i derive analytical approximations for the solutions of more general problems of this kind when the costs of change are small the idea that small costs of change induce large amounts of inertia has been popularized in the model of akerlof and yellen 1985 mankiw 1985 and others in these models second order small costs of making price changes yield price stickiness in response to first order changes in the money supply this is a simple application of the envelope theorem but these models are static and their application to a dynamic reality must assume either permanent shocks or static expectations when there is ongoing uncertainty which is rationally expected by the decision maker the option value of the status quo enlarges the zone where inaction is optimal adding these features to the mankiw akerlof yellen may model i show that fourth order small costs of change generate first order inertia

the role of interest rate taxes in credit markets with divisible projects and asymmetric information this paper assumes that entrepreneurs have divisible projects with random payoffs however managerial skill is unobservable to outsiders projects are assumed to be financed through debt a pooling equilibrium is shown to exist in which good and bad entrepreneurs sell debt at the same price if both types of entrepreneur have a positive probability of bankruptcy project scale will be too large this provides a prima facie case for raising interest rates and hence the cost of capital through taxation if in equilibrium only the poor entrepreneurs go bankrupt there is an outlying possibility that interest rates are too low and a subsidy is called for

identifying price reviews by firms an econometric approach price reviews are a potentially costly activity a significant fraction of unchanged prices may stem from firms not reviewing prices rather than from obstacles to changing prices per se such as menu costs in this paper we disentangle these two causes of price stickiness by estimating an inflated ordered probit model on a panel of french manufacturing firms the results point to a low frequency of price reviews suggestive of the relevance of information costs as a determinant of the observed price stickiness in view of the inattentive producers literature pointing that the source of price rigidity matters this is suggestive of a large real effect of monetary policy

evaluating microfoundations for aggregate price rigidities evidence from matched firm level data on product prices and unit labor cost a number of competing business cycle models have recently emerged all of which can explain why nominal shocks have real effects 1 although sharing a large number of common features a key difference between these models lies in the assumptions of how firms set prices and process information yet there exists very little direct micro evidence on the credibility of these assumptions this paper uses detailed data on product prices and unit labor cost merged at the firm level to evaluate competing sets of assumptions regarding firms price setting behavior thereby we provide firsthand evidence on the empirical relevance of the microfoundations of different dynamic stochastic general equilibrium dsge models

the phillips curve under state dependent pricing abstract we derive a phillips curve equation from the dynamic stochastic general equilibrium dsge model with state dependent pricing developed by dotsey et al 1999 state dependent pricing and the general equilibrium dynamics of money and output quarterly journal of economics 114 655 690 this state dependent phillips curve encompasses the new keynesian phillips curve nkpc based on calvo type price setting as a special case we analyze the effect of the state dependent terms that is the variations in the distributions of price vintages on inflation persistence and we examine whether the hybrid nkpc that is the nkpc extended by a lagged inflation term can adequately describe inflation dynamics generated in a calibrated state dependent pricing economy

is inflation persistence different in reality this study examines the inflation persistence using both online and official price indexes in argentina brazil china japan germany south africa the uk and the us using fractional integration technique the main results suggest that the degree of persistence estimated by the long memory parameter is smaller when using online price indexes believed to be a more realistic measure of inflation mainly in the cases of argentina brazil china and the uk monetary policy implications are discussed

imperfect information and the theory of government intervention in farm credit markets this paper describes some possible economic motivations for government intervention in farm credit markets these motivations are made possible by explicit departures from the perfect information and complete market assumptions that underlie both the neoclassical competitive paradigm and the fundamental theorems of welfare economics to be more precise the analysis focuses on three types of asymmetric information between farmers and prospective outside investors both of whom are assumed to be risk neutral arguably the three informational asymmetries examined here represent natural departures from perfect markets in that unlike the unencumbered neoclassical model each elicits farmers optimal use of debt contracts rather than equity instruments or other contractual forms to raise investment capital despite their consistency with observed contractual choices all three of the models analyzed below yield free market equilibria that diverge from first best perfect information outcomes given the inefficiency of these market equilibria the key question raised and discussed here is can government improve upon the derived competitive outcomes and if so how despite the enormity of the credit rationing literature only a few extant studies address this question in models that are consistent with debt contracts among them are demeza and webb 1987 1988 1989 and innes 1988 which focus on the third type of informational asymmetry considered below the other two information structures posited in this paper have been studied in several analyses of credit markets but with attention focused on positive attributes of the unfettered competitive equilibrium rather than on prospective implications for welfare enhancing government intervention in what follows th s literature is surveyed and for the first two information structures some new policy results a e presented a critical discussion of the paper s limitations concludes the article

the inflation persistence of staggered contracts one of the criticisms routinely advanced against models with staggered contracts is their inability to generate inflation persistence this paper finds that staggered contracts a la taylor are in fact capable of reproducing the inflation persistence implied by u s data following fuhrer and moore i capture the moments that the model needs to replicate by using the correlograms from a small vector autoregression var i estimate the contract parameters using the method of maximum likelihood the correlogram of inflation for the contract model is very close to the correlogram from the var by the same metric taylor contracts fare poorly in reproducing the comovements of inflation and output

menu costs and phillips curves this paper develops a model of a monetary economy in which individual firms are subject to idiosyncratic productivity shocks as well as general inflation sellers can change price only by incurring a real menu cost we calibrate this cost and the variance and autocorrelation of the idiosyncratic shock using a new u s data set of individual prices due to klenow and kryvtsov the prediction of the calibrated model for the effects of high inflation on the frequency of price changes accords well with international evidence from various studies the model is also used to conduct numerical experiments on the economy s response to various shocks in none of the simulations we conducted did monetary shocks induce large or persistent real responses

selection and monetary non neutrality in time dependent pricing models for a given frequency of price adjustment monetary non neutrality is smaller if older prices are disproportionately more likely to change selection for the age of prices provides a complete characterization of price setting frictions in time dependent models selection for older prices is weaker and non neutralities are larger if the hazard function of price adjustment is less strongly increasing selection is weaker if there is heterogeneity in price stickiness finally selection is weaker if durations of price spells are more variable in particular the taylor 1979 model exhibits maximal selection for older prices whereas the calvo 1983 model exhibits no selection

price setting with menu cost for multi product firms we model the decisions of a multiproduct firm that faces a fixed menu cost once it is paid the firm can adjust the price of all its products we characterize analytically the steady state firm s decisions in terms of the structural parameters the variability of the flexible prices the curvature of the profit function the size of the menu cost and the number of products sold we provide expressions for the steady state frequency of adjustment the hazard rate of price adjustments and the size distribution of price changes all in terms of the structural parameters we study analytically the impulse response of aggregate prices and output to a monetary shock the size of the output response and its duration both increase with the number of products they more than double as the number of products goes from 1 to 10 quickly converging to the response of taylor s staggered price model

more facts about prices france before and during the great recession using microprice data we document new facts on price rigidity in france i each month 20 1 of prices are changed which compares to 24 1 in the united states excluding sales however the fraction of prices modified each month is about the same in france and in the united states around 17 ii the distribution of price changes is quite dispersed iii the frequencies of price increases and decreases contribute a lot to inflation variations and price increases are more frequent in january even when sales are excluded iv sales contribute significantly to the volatility of inflation but play a minor role in the transmission of macroeconomic fluctuations to prices and v during the great recession patterns of price adjustment were only slightly modified

rigidities and adjustments of daily prices to costs evidence from supermarket data we assess the extent of inertia in grocery retail prices using data on prices and costs from a large supermarket chain in colombia relative to previous work our analysis benefits from encompassing a wide variety of products availability of reliable replacement cost data and the daily frequency of the data we confirm the existence of significant nominal rigidities in reference prices three months and even more so in reference costs about six months but differing depending on the type of product being on average smaller in the case of perishable goods using a non linear autoregressive distributed lag nardl approach to cointegration we examine the path of prices relative to costs and determine the speed of adjustment of prices to shocks we find significant mean reversion but also uncover asymmetries in response to positive and negative changes in costs as a novel finding we uncover evidence of the effect of market concentration input price volatility along with own labels and the perishable nature of products on the likelihood of price asymmetry in response to costs changes

fixed adjustment costs and aggregate fluctuations this paper studies the analytics of a canonical model of xed adjustment costs in the presence of idiosyncratic productivity shocks we provide a novel analytical characterization of the steady state and dynamics of aggregate outcomes implied by the model the dynamics are shown to have an intuitive partial adjustment representation these results are then used to derive a set of approximations to model outcomes in the presence of a small adjustment cost surprisingly these reveal that both aggregate steady state outcomes and aggregate dynamics are approximately neutral with respect to a small xed adjustment cost we show that this neutrality result emerges from a symmetry property in the distributional dynamics of the model and arises even in the absence of general equilibrium adjustment of prices a set of quantitative illustrations con rms these analytical results for parameterizations commonly used in the literature on employment adjustment

is inflation sticky abstract new keynesian sticky price models predict that monetary policy can affect real variables however they also predict that inflation can be reduced without depressing output or employment in fact bringing down inflation is costly presenting a challenge to the new keynesian model two departures from the new keynesian model predict costly disinflation one assumes sticky inflation rather than sticky prices while the other assumes less than perfectly rational expectations taking into account information from surveys of inflation expectations i find the evidence suggests that inflation is not sticky and that inflation expectations are less than perfectly rational

the cost of ruling cabinet duration and the median gap model in a recent article paldam and skott 1995 provide atheoretical explanation for an important empirical phenomenonin democratic countries incumbent governments tend to losevotes in this paper i show that paldam and skott stheoretical explanation for this cost of ruling ispotentially much stronger than they recognize specifically when generalized in a straightforward way their modelexplains not only the cost of ruling itself but also a secondwell established empirical fact that the longer an incumbentgovernment has been in power the more votes it loses further this generalization of the model produces twoadditional empirical hypotheses that have not yet been testedin the empirical literature

the un importance of forward looking behavior in price specifications the seminal work of edmund s phelps 1978 john b taylor 1980 and guillermo a calvo 1983 developed forward looking models of price determination that imparted inertia to the price level these models incorporate expectations of future prices and excess demand by imposing constraints typically lag lead symmetry constraints that force future variables to enter the specification in this paper the author tests the empirical significance of future prices in specifications like those of taylor he finds that expectations of future prices are empirically unimportant in explaining price and inflation behavior however the dynamics of a model that includes a purely backward looking inflation specification differ substantially and not altogether pleasingly from those with a forward looking specification copyright 1997 by ohio state university press

sectoral and aggregate inflation dynamics in the euro area this paper synthesises the implications of recent statistical evidence regarding inflation persistence in the euro area for aggregate data the degree of inflation persistence appears to be very high for sample periods spanning multiple decades but falls dramatically once we allow for time variation in the mean level of inflation furthermore the timing of these breaks in mean generally coincides with observed shifts in the monetary policy regime finally sectoral inflation series exhibit much less persistence than aggregate inflation mainly because of the influence of transitory sector specific shocks jel e31 c22 c43

optimal inattention to the stock market inattentive agents update their information sporadically and thus respond belatedly to news we generate optimally inattentive behavior by assuming that to observe the value of his investment portfolio the consumer must pay a cost that is proportional to the portfolio s contempo raneous value it is optimal for the consumer to check his investment portfolio at equally spaced points in time consuming from a riskless trans actions account in the interim the riskless transactions account that finances consump tion guarantees that funds are never unwittingly exhausted we show that the optimal interval of time between consecutive observations of the value of the portfolio is the unique positive solution to a nonlinear equation quantitatively even a small observation cost one basis point of wealth implies a substantial eight month decision interval under conventional parameter values

monetary shocks in models with observation and menu costs we study economies where price stickiness arises due to the simultaneous presence of both menu and information costs we identify the relative importance of these costs using firm s survey data and analyze the response of prices and output following a permanent unexpected monetary shock for a given frequency of price adjustment we find that the information friction significantly amplifies the real effect of the shock when the shock is small or when it is not known by firms instead when the shock is large and known to firms the flexibility of prices increases and the real effects gradually vanish

intrinsic inflation persistence empirical evidence suggests that inflation determination is not purely forward looking but models of price setting have struggled to rationalize this finding without directly assuming backward looking pricing rules for firms this paper shows that intrinsic inflation persistence can be explained with no deviation from optimizing forward looking behaviour if prices that have remained fixed for longer are more likely to be changed than those set recently a relationship between the probability of price adjustment and the duration of a price spell is shown to imply a simple hybrid phillips curve including lagged and expected inflation which is estimated using macroeconomic data

a rational voter explanation of the cost of ruling it is well known that the average government loses votes the so called cost of ruling we show that the loss can be explained as a perfectly rational demand for change in a median voter model once the model is amended to let the two parties be visibly different

farm debt default and foreclosure an economic rationale for policy action economic analysis of farm programs typically focusses on economic costs here we show that because of market failures and imperfections there are possible economic benefits to be derived from programs which reduce or eliminate the threat of default and foreclosure a production model of an indebted firm is developed and serves as a basis for an aggregate model which identifies possible costs and benefits from a program of transfers to indebted farmers the challenge facing policy makers is to design programs which capture the benefits of reducing the probability of default while minimizing perverse incentive effects of such programs

from hyperination to stable prices argentina s evidence on menu cost models we review and extend several comparative statics results of xed menu cost models of price setting rms facing real idiosyncratic shocks such as the type studied by golosov and lucas 2007 as well as by many others these results are confronted with their empirical counterparts using the micro data underlying argentina s consumer price index for a time period where ination rates vary from almost 5000 per year

interpreting inflation persistence comments on the conference on quantitative evidence on price determination the past decade has seen important advances in the analysis of price setting behavior most notably in my view a great deal of effort has been directed at the development of models that on the one hand have an explicit behavioral interpretation the models are clear about who sets prices what they seek to achieve when choosing prices and to what constraints they are subject when making the decision and at the same time can be parameterized so as to be compared in detail to inflation data this has allowed these models to be incorporated into complete dsge models of business fluctuations and of the monetary transmission mechanism that can be econometrically estimated this raises the prospect that it should soon be possible to base policy analysis on models that are both quantitatively realistic and plausibly invariant under the kinds of changes in policy that the analyst may wish to contemplate some argue that these two desiderata remain in considerable tension with one another that one cannot insist upon optimizing foundations at least under the current state of knowledge without substantial sacrifice of quantitative realism it is somewhat unfair however to present the quest for a model with optimizing foundations as a retreat from full insistence upon empirical realism given the fact that models with clear behavioral interpretations can be checked against a wider range of types of empirical evidence which should ultimately allow greater confidence in the realism of the specification that can withstand such scrutiny for example the exhaustive recent study of evidence on price setting in the euro area undertaken by the eurosystem s inflation persistence network compares alternative models in the light of three distinct

partial adjustment and staggered price setting this paper compares taylor style staggered price setting to partial adjustment of prices or calvo staggering in a small optimizing is lm model in contrast to the overwhelming perception in the literature the models are not similar for most parameterizations in particular the dynamic response of the economy to shocks is quite different in the two models and the welfare cost of price rigidity is eight or more times larger in the calvo model than in the taylor model for typical calibrations suggestions for calibrations under which the models are more similar are also presented

asymmetric valuations and the role of collateral in loan agreements loan contracts with provision for collateral are of two general types in one the collateral may be an existing asset of the borrowing firm which is pledged to a lender in the event of default in this case collateral does not increase the assets that the borrower would lose if there is default since all the borrower s assets are attachable therefore the expected marginal cost to the borrower of providing an additional unit of collateral includes principally transactions costs associated with the collateral l this describes the usual type of commercial loan arrangement with the collateral being either equipment real estate accounts receivable or inventories in the other type of loan contract the collateral is an additional asset that is given up by the borrower if there is default that is in addition to the usual assets that are available to its lenders the borrower assigns as collateral to a creditor an asset that would normally not be legally attachable this arrangement is more common in small business loans that are secured by a personal asset e g a house of the entrepreneur likewise debt issued by a legally separate subsidiary may be secured by an asset of the parent firrn in these cases the expected marginal cost to the borrower the owner manager of the small firm or the parent corporation in the latter example of providing an additional unit of collateral

credit market efficiency and tax policy in the presence of screening costs after establishing the existence of capital market equilibrium in the presence of asymmetric information and screening costs this paper examines tax policies designed to correct the attendant externalities when projects differ in expected returns it is shown to be ambiguous whether costly private screening weakens or strengthens the case for an interest income tax however when projects differ only in riskiness as in the model of stiglitz and weiss screening opportunities cause the efficiency case for tax intervention to disappear

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

borders and nominal exchange rates in risk sharing models of risk sharing predict that relative consumption growth rates are positively related to changes in real exchange rates we investigate this hypothesis using a new multicountry and multiregional data set within countries we find evidence for risk sharing episodes of high relative regional consumption growth are associated with regional real exchange rate depreciation across countries however the association is reversed relative consumption and real exchange rates are negatively correlated we define this reversal as a border effect we find the border effect and show that it accounts for over half of the deviations from full risk sharing since cross border real exchange rates involve different currencies it is natural to ask how much of the border effect is accounted for by movements in exchange rates our measures indicate that a large part of the border effect comes from nominal exchange rate fluctuations we develop a simple open economy model that is consistent with the importance of nominal exchange rate variability in accounting for deviations from cross country risk sharing

five facts about prices a reevaluation of menu cost models are price decreases 3 the frequency of price increases covaries strongly with inflation whereas the frequency of price decreases and the size of price increases and price decreases do not 4 the frequency of price change is highly seasonal it is highest in the first quarter and then declines 5 we find no evidence of upwardsloping hazard functions of price changes for individual products we show that the first second and third facts are consistent with a benchmark menu cost model whereas the fourth and fifth facts are not

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 by the productivity shock and positively by the output gap lagged real interest rate has a negative effect on prices unless human subjects choose the interest rate or firms sell perfect substitutes in the output market there is inertia in price setting firms integrate wage increases into their prices and there is evidence of adaptive behavior in price setting in our laboratory economy the hazard function for price changes however is upward sloping in contrast to most empirical studies

price points and price dynamics abstract a standard model of price setting is extended to include an important role for price points as well as sticky information it makes empirically reasonable predictions about the frequency of price adjustments the sizes of price increases and decreases the shape of the hazard function the fraction of price changes that are price increases and the relationship between price changes and inflation when the model of price setting is integrated into a small scale dsge model it implies plausible aggregate effects of monetary policy in contrast to a model with a prominent role for price points but no information rigidities

sticky prices new evidence from retail catalogs this paper presents new results on the size frequency and synchronization of price changes for twelve selected retail goods over the past 35 years three basic facts about the data are uncovered first nominal prices are typically fixed for more than one year although the time between changes is very irregular second prices change more often during periods of high overall inflation third when prices do change the sizes of the changes are widely dispersed both large and small changes occur for the same item and the sizes of these changes do not closely depend on overall inflation

intrinsic persistence of wage inflation in new keynesian models of the business cycles we derive and estimate a new keynesian wage phillips curve that accounts for intrinsic inertia in line with microevidence on wage setting we consider a wage setting model featuring an upward sloping hazard function based on the notion that the probability of resetting a wage depends on the time elapsed since the last reset our wage phillips curve embeds also backward terms we test the hazard function slope using generalized method of moment estimation then placing our equation in a small scale new keynesian model we investigate its dynamic properties using bayesian estimation model comparison shows that our model outperforms commonly used alternative methods to introduce persistence

pricing models a bayesian dsge approach for the u s economy this paper compares and estimates three pricing mechanisms in the context of a small dsge model of the u s economy we interpret our results as favoring the pricing mechanism presented in wolman 1999 wolman model over the new keynesian model with indexation gali and gertler 1999 smets and wouters 2004a and the sticky information model of mankiw and reis 2002 the key factor that explains the performance of the wolman model is that the data reject the key assumption of the new keynesian model that the firm s probability of price change is constant over time and independent of the contract s vintage our results also show that incorporating indexation in the new keynesian model represents a poor expedient in matching the autocorrelation function of the inflation process over the last 20 years

costly monitoring loan contracts and equilibrium credit rationing this paper develops a model with asymmetrically informed agents and costly monitoring of loan contracts where an equilibrium can exhibit credit rationing borrowers are identical ex ante but some receive loans and others do not in contrast to existing credit rationing theories rationing does not occur here due to inflexible prices adverse selection or moral hazard optimizing behaviour produces a standard debt contract in equilibrium the aggregate quantity of loans and equilibrium interest rates respond differently depending on whether there is rationing in equilibrium

state dependent or time dependent pricing does it matter for recent u s inflation in the 1988 2004 micro data collected by the u s bureau of labor statistics for the cpi price changes are frequent every 4 7 months depending on the treatment of sale prices and large in absolute value on the order of 10 the size and timing of price changes varies considerably for a given item but the size and probability of a price change are unrelated to the time since the last price change movements in aggregate inflation reflect movements in the size of price changes rather than the fraction of items changing price due to offsetting movements in the fraction of price increases and decreases neither leading time dependent models taylor or calvo nor 1 st generation state dependent models match all of these facts some 2 nd generation state dependent models however appear broadly consistent with the empirical patterns

collateral and rationing sorting equilibria in monopolistic and competitive credit markets the authors examine how market structure affects credit allocation under universal risk neutrality and asymmetric information about borrowers they consider both monopolistic and perf ectly competitive banks and examine the role of collateral in each ca se when a bank is a monopolist on the loan side they find collatera l is never used and asymmetric information results in reduced bank le nding under perfect competition collateral has a useful sorting rol e moreover rationing is possible even with collateral availability and perfectly elastic deposit supply in this setting the authors sh ow co signers are valuable social welfare properties of the monopoly and competitive equilibria are also compared copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

staggered price contracts and inflation persistence some general results despite their popularity as theoretical tools for illustrating the effects of nominal rigidities some have questioned whether models based on staggered price contracts with rational expectations can match the persistence of the empirical inflation process this article presents some general results about this class of models it is shown that these models do not have a problem matching high autocorrelations for inflation however they fail to explain a key feature of reducedform phillips curve regressions the positive dependence of inflation on its own lags it is shown that staggered price contracting models instead predict that the coefficients on these lag terms should be negative

a dynamic economy with costly price adjustments this paper studies a general equilibrium model of a dynamic economy with menu costs each firm s productivity is exposed to idiosyncratic and aggregate productivity shocks around a trend and the money supply to monetary shocks around a trend all consumption pricing and production decisions are based on optimizing behavior there exists a staggered markov perfect equilibrium with prices determined by a two sided s s markup strategy the paper analyzes the optimal markup strategy and investigates the dynamics of the price index and the aggregate output the welfare consequences of the uncertain aggregate productivity and money supply are also examined

endogenous time dependent rules and inflation inertia in this paper we endogenize fixed price time dependent rules to examine the output effects of monetary disinflation we derive the optimal rules in and out of inflationary steady states and develop a methodology to aggregate individual pricing rules which vary through time because of strategic complementarities we have to solve both problems simultaneously this allows us to reassess the output costs of monetary disinflations including aspects such as the roles of the initial level of inflation and of the degree of strategic complementarity in price finally we relax the strict assumption of pure time dependent rules by allowing price setters to re evaluate their rules at the time disinflation is announced

european inflation dynamics abstract we provide evidence on the fit of the new phillips curve npc for the euro area over the period 1970 1998 and use it as a tool to compare the characteristics of european inflation dynamics with those observed in the u s we also analyze the factors underlying inflation inertia by examining the cyclical behavior of marginal costs as well as that of its two main components namely labor productivity and real wages some of the findings can be summarized as follows a the npc fits euro area data very well possibly better than u s data b the degree of price stickiness implied by the estimates is substantial but in line with survey evidence and u s estimates c inflation dynamics in the euro area appear to have a stronger forward looking component i e less inertia than in the u s d labor market frictions as manifested in the behavior of the wage markup appear to have played a key role in shaping the behavior of marginal costs and consequently inflation in europe

optimal price setting with observation and menu costs we study the price setting problem of a firm in the presence of both observation and menu costs in this problem the firm optimally decides when to collect costly information on the adequacy of its price an activity which we refer to as a price review upon each review the firm chooses whether to adjust its price subject to a menu cost and when to conduct the next price review this behavior is consistent with recent survey evidence documenting that firms revise prices infrequently and that only a few price revisions yield a price adjustment the goal of the paper is to study how the firm s choices map into several observable statistics depending on the level and relative magnitude of the observation vs the menu cost the observable statistics are the frequency of price reviews the frequency of price adjustments the size distribution of price adjustments and the shape of the hazard rate of price adjustments we provide an analytical characterization of the firm s decisions and a mapping from the structural parameters to the observable statistics we compare these statistics with the ones obtained for the models with only one type of cost the predictions of the model can with suitable data be used to quantify the importance of the menu cost vs the information cost we also consider a version of the model where several price adjustment are allowed between observations a form of price plans or indexation we find that no indexation is optimal for small inflation rates

the real effects of monetary shocks in sticky price models a sufficient statistic approach abstract we prove that the ratio of kurtosis to the frequency of price changes is a sufficient statistic for the real effects of monetary shocks measured by the cumulated output response following the shock the sufficient statistic result holds in a large class of models which includes taylor 1980 calvo 1983 reis 2006 golosov and lucas 2007 nakamura and steinsson 2010 midrigan 2011 and alvarez and lippi 2014 several models in this class are able to account for the positive excess kurtosis of the size distribution of price changes that appears in the data we review empirical measures of kurtosis and frequency and conclude that a model that successfully matches the microevidence on kurtosis and frequency produces real effects that are about four times larger than in the golosov lucas model and about 30 percent below those of the calvo model we discuss the robustness of our results to changes in the setup including small inflation and leptokurtic cost shocks jel e23 e31

moral hazard and limited liability implications for the theory of the firm this paper presents a theory of the firm based on moral hazard in the provision of effort by an owner manager who borrows money in financial markets under conditions of limited liability the authors examine the relationship between the financial structure of the firm and the effort and output decisions of the owner manager results are reported concerning the determination of the firm s optimal financial structure and concerning the positive and normative implications of financial structure for pure competition and monopoly they also identify a strategic advantage from equity finance under cournot oligopoly copyright 1989 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

reference prices costs and nominal rigidities we assess the importance of nominal rigidities using a new weekly scanner dataset we find that nominal rigidities take the form of inertia in reference prices and costst defined as the most common prices and costs within a given quarter reference prices are particularly inertial and have an average duration of roughly one year even though weekly prices change roughly once every two weeks we document the relation between prices and costs and find sharp evidence of state dependence in prices we use a simple model to argue that reference prices and costs are useful statistics for macroeconomic

signaling in credit markets in this paper we show that under a variety of alternative assumptions about the private information of loan applicants a competitive market for loans is characterized by screening banks separate out loan risks by offering higher loans at higher interest rates depending on the nature of the informational asymmetry it may be that applicants with less risky projects select larger rather than smaller loans comparative statics implications are also examined in particular we explore the effects of an increase in banks cost of funds on average loan quality

monetary non neutrality in a multisector menu cost model empirical evidence suggests that as much as one third of the u s business cycle is due to nominal shocks we calibrate a multisector menu cost model using new evidence on the cross sectional distribution of the frequency and size of price changes in the u s economy we augment the model to incorporate intermediate inputs we show that the introduction of heterogeneity in the frequency of price change triples the degree of monetary non neutrality generated by the model we furthermore show that the introduction of intermediate inputs raises the degree of monetary non neutrality by another factor of three without adversely affecting the model s ability to match the large average size of price changes a single sector model with a frequency of price change equal to the median rather than the mean generates monetary non neutrality similar to that in our multisector model our multisector model with intermediate inputs generates variation in real output in response to calibrated aggregate nominal shocks that can account for roughly 23 of the u s business cycle

the q s s pricing rule we introduce menu costs in the search theoretic model of imperfect competition of burdett and judd when menu costs are not too large the equilibrium is such that sellers follow a q s s pricing rule according to the rule a seller lets inflation erode the real value of its nominal price until it reaches some point s then the seller pays the menu cost and resets the real value of its nominal price to a point randomly drawn from a distribution with support s q where s s q a q s s equilibrium differs with respect to a standard s s equilibrium 1 in a q s s equilibrium sellers sometimes keep their nominal price constant to avoid paying the menu cost other times because they are indifferent to changes in the real value of their price an exploratory calibration reveals that menu costs account less than half of the observed duration of nominal prices 2 in a q s s equilibrium higher inflation leads to higher real prices as sellers pass onto buyers the cost of more frequent price adjustments and to lower welfare

investment and government intervention in credit markets when there is asymmetric information abstract this paper models private firm investment choices and government credit policy in an entrepreneurial firm financial market wherein firm owners have better information about the quality of their return distributions than do external financiers the analysis shows that despite the absence of an informational advantage the government can often increase social welfare by offering subsidized debt contracts however the paper also finds that some common credit subsidy policies including loan guarantees and government backing of targeted lending institutions yield constrained inefficient outcomes in general

accounting for incomplete pass through recent theoretical work has suggested a number of potentially important factors in causing incomplete pass through of exchange rates to prices including markup adjustment local costs and barriers to price adjustment we empirically analyze the determinants of incomplete passthrough in the coee industry the observed pass through in this industry replicates key features of pass through documented in aggregate data prices respond sluggishly and incompletely to changes in costs we use microdata on sales and prices to uncover the role of markup adjustment local costs and barriers to price adjustment in determining incomplete pass through using a structural oligopoly model that nests all three potential factors the implied pricing model explains the main dynamic features of short and long run pass through local costs reduce long run pass through by a factor of 59 relative to a ces benchmark markup adjustment reduces pass through by an additional factor of 33 where the extent of markup adjustment depends on the estimated super elasticity of demand the estimated menu costs are small 0 23 of revenue and have a negligible eect on long run pass through but are quantitatively successful in explaining the delayed response of prices to costs we nd that delayed passthrough in the coee industry occurs almost entirely at the wholesale rather than the retail level

investigating nonneutrality in a state dependent pricing model with firm level productivity shocks in a model with fixed cost of price adjustment and idiosyncratic shocks two parameterizations match a large set of microeconomic facts yet display different degrees of nonneutrality although there is substantial nonneutrality in both cases the model does not behave like a time dependent model as changes in the distribution of firms account for roughly a third of the short run response of the price level to a monetary shock we use the model to examine how aggregating firm behavior can generate flat hazards we also find that a recently developed steady state statistic is an imperfect guide to characterizing nonneutrality

optimal monetary policy optimal monetary policy maximizes the welfare of a representative agent given frictions in the economic environment constructing a model with two sets of frictions costly price adjustment by imperfectly competitive firms and costly exchange of wealth for goods we find optimal monetary policy is governed by two familiar principles first the average level of the nominal interest rate should be sufficiently low as suggested by milton friedman that there should be deflation on average yet the keynesian frictions imply that the optimal nominal interest rate is positive second as various shocks occur to the real and monetary sectors the price level should be largely stabilized as suggested by irving fisher albeit around a deflationary trend path since expected inflation is roughly constant through time the nominal interest rate must therefore vary with the fisherian determinants of the real interest rate although the monetary authority has substantial leverage over real activity in our model economy it chooses real allocations that closely resemble those which would occur if prices were flexible in our benchmark model there is some tendency for the monetary authority to smooth nominal and real interest rates

using elasticities to derive optimal bankruptcy exemptions this article studies the optimal determination of bankruptcy exemptions for risk averse borrowers who use unsecured contracts but have the possibility of defaulting in a large class of economies knowledge of four variables is sufficient to determine whether a bankruptcy exemption level is optimal or should be increased or decreased these variables are 1 the composition of households liabilities 2 the sensitivity of the credit supply schedule to exemption changes 3 the probability of filing for bankruptcy with non exempt assets and 4 the value given by households to a marginal dollar in different states which can be mapped to changes in households consumption i recover empirical estimates of the sufficient statistics using u s data over the period 2008 16 and find that increasing exemption levels improves overall welfare although there is substantial variation in estimated welfare gains across u s states and income quintiles

new tests of the new keynesian phillips curve abstract lagged dependent variables typically play an important role in empirical models of inflation do these lags reflect backward looking inflation expectations or do they proxy for rational forward looking expectations as in the new keynesian phillips curve gali and gertler 1999 inflation dynamics a structural econometric analysis journal of monetary economics 44 195 222 attempt to answer this question using gmm to estimate specifications incorporating both lagged and future inflation they report small coefficients on lagged inflation and conclude that the new keynesian model provides a good first approximation to inflation dynamics we show that these tests have low power against alternative backward looking specifications and demonstrate that their results are also consistent with a backward looking phillips curve using an alternative approach we find that the new keynesian pricing model cannot explain the importance of lagged inflation in standard inflation regressions and find that forward looking terms play a very limited role in explaining inflation dynamics

policy mis representation and the cost of ruling u s presidential elections in comparative perspective the cost of ruling effect on electoral support is well established that is governing parties tend to lose vote share the longer they are in power although we know this to be true we do not know why it happens this research examines whether the cost of ruling results at least in part from the tendency for governing parties to shift policy further away from the average voter it first considers differences in political institutions and how they might influence cost of ruling owing to policy drift and then tests the hypothesis focusing on u s presidential elections which is an unfavorable case to find such an effect results confirm a clear cost of ruling effect in these elections and demonstrate that policy misrepresentation is an important mechanism that is the policy liberalism of presidents from different parties diverges over time as their tenure in the white house increases and the degree to which it does matters for the presidential vote policy is not the only thing that matters and other

state dependent pricing and the general equilibrium dynamics of money and output economists have long suggested that nominal product prices are changed infrequently because of fixed costs in such a setting optimal price adjustment should depend on the state of the economy yet while widely discussed statedependent pricing has proved difficult to incorporate into macroeconomic models this paper develops a new tractable theoretical state dependent pricing framework we use it to study how optimal pricing depends on the persistence of monetary shocks the elasticities of labor supply and goods demand and the interest sensitivity of money demand

a structural approach to identifying the sources of local currency price stability the inertia of the local currency prices of traded goods in the face of exchange rate changes is a well documented phenomenon in international economics this paper develops a structural model to identify the sources of this local currency price stability and applies it to micro data from the beer market the empirical procedure exploits manufacturers and retailers first order conditions in conjunction with detailed information on the frequency of price adjustments following exchange rate changes to quantify the relative importance of local non traded cost components markup adjustment by manufacturers and retailers and nominal price rigidities in the incomplete transmission of such changes to prices we find that on average approximately 60 of the incomplete exchange rate pass through is due to local non traded costs 8 to markup adjustment 30 to the existence of own brand price adjustment costs and 1 to the indirect strategic effect of such costs though these results vary considerably across individual brands according to their market shares

optimal sticky prices under rational inattention this paper presents a model in which price setting firms decide what to pay attention to subject to a constraint on information flow when idiosyncratic conditions are more variable or more important than aggregate conditions firms pay more attention to idiosyncratic conditions than to aggregate conditions when we calibrate the model to match the large average absolute size of price changes observed in micro data prices react fast and by large amounts to idiosyncratic shocks but only slowly and by small amounts to nominal shocks nominal shocks have strong and persistent real effects we use the model to investigate how the optimal allocation of attention and the dynamics of prices depend on the firms environment jel e 3 e5 d8

scraped data and sticky prices i use daily prices collected from online retailers in five countries to study the impact of measurement bias on three common price stickiness statistics relative to previous results i find that o

implications of rational inattention abstract a constraint that actions can depend on observations only through a communication channel with finite shannon capacity is shown to be able to play a role very similar to that of a signal extraction problem or an adjustment cost in standard control problems the resulting theory looks enough like familiar dynamic rational expectations theories to suggest that it might be useful and practical while the implications for policy are different enough to be interesting

inflation dynamics and time varying volatility new evidence and an ss interpretation is monetary policy less effective at increasing real output during periods of high volatility than during normal times in this article i argue that greater volatility leads to an increase in aggregate price flexibility so that nominal stimulus mostly generates inflation rather than output growth to do this i construct price setting models with volatility shocks and show these models match new facts in cpi micro data that standard price setting models miss i then show that these models imply that output responds less to nominal stimulus during times of high volatility furthermore because volatility is countercyclical this implies that nominal stimulus has smaller real effects during downturns for example the estimated output response to additional nominal stimulus in september 1995 a time of low volatility is 55 larger than the response in october 2001 a time of high volatility jel codes e10 e30 e31 e50 d8 copyright 2014 oxford university press