inflation dynamics and real marginal costs new evidence from u s manufacturing industries this paper deals with the analysis of price setting in u s manufacturing industries recent studies have heavily criticized the ability of the new keynesian phillips curve nkpc to t aggregate in ation see e g rudd and whelan 2006 can rational expectations sticky price models explain in ation dynamics american economic review vol 96 1 pp 303 320 we challenge this evidence showing that forward looking behavior as implied by the new keynesian model of price setting is widely supported at the sectoral level in fact current and expected future values of the income share of intermediate goods emerge as

inflation dynamics and the output inflation trade off international panel data evidence we explore the impact of inflation and its variability on the output inflation trade off using a unified single step approach in a panel data context a limitation of earlier empirical approaches is that they focus on either cross country or country by country time series analyses this paper employs a dynamic heterogeneous panel data specification and uses an all encompassing estimation framework that accounts for parameter heterogeneity cross sectional dependence dynamics and non stationarity our sample covers 60 countries from 1970 to 2010 while inflation variability reduces the trade off for specific periods and country groups an unambiguous and more pronounced negative relation emerges between the inflation rate and the responsiveness of real output to nominal shocks the findings are in line with the new keynesian view of a negative association between the rate of inflation and the output inflation trade off as well as with the observed flattening of the phillips curve over the past decades

services deepening and the transmission of monetary policy the structural transformation from manufacturing to services comes with a process of services deepening the services share of intermediate inputs rises over time moreover inflation reacts less to monetary policy shocks in countries that are more intensive in services intermediates we rationalize these facts using a two sector new keynesian model where trends in sectoral productivities generate endogenous variations in the input output matrix services deepening reduces the contemporaneous response of inflation to monetary policy shocks through a marginal cost channel since services prices are stickier than manufacturing prices the rise of services intermediates raises the sluggishness of sectoral marginal costs and inflation rates

heterogeneous dynamics aggregation and the persistence of economic shocks estimates of shock persistence based on disaggregate or on aggregate data are frequently very different this article takes a step toward reconciling this apparent disconnect between micro and macro based estimates of shock response it is shown that although the average of the individual impulse response functions irfs is identical to the aggregate irf averages of other popular persistence measures such as the sum of the autoregressive coefficients among others tend to be larger the higher the aggregation level the theoretical results are illustrated with two applications that use u s and european inflation data

economic welfare evaluations for producers under uncertainty the validity of producer and consumer surplus measures of firm welfare under risk is examined under constant absolute risk aversion and output price uncertainty only these measures are an exact measure of firm welfare as defined by compensating variation equivalent variation or the change in the certainty equivalent under decreasing absolute risk aversion qualitative comparisons of various measures are discussed for example producer s surplus as measured by the area above the uncompensated risk averse supply curve overstates the compensating variation of a change in expected price of output procedures for calculating firm welfare under production uncertainty and a variety of economic environments are proposed generally these procedures are applicable only when absolute risk aversion is constant

optimal monetary policy responses to relative price changes abstract an optimizing model with a flexible price sector and a sticky price sector is presented to analyze the effects of relative price changes on inflation fluctuations the relative price of the flexible price good represents a shift parameter of the new keynesian phillips curve the optimal monetary policy is to target sticky price inflation rather than a broad inflation measure although stabilizing the relative price around its efficient value is one of the appropriate goals of the central bank stabilizing sticky price inflation is sufficient for achieving this goal an optimal monetary policy for a small open economy is also discussed

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

habit formation in consumer preferences evidence from panel data this paper tests for the presence of habit formation using household data a simple model of habit formation implies a condition relating the strength of habits to the evolution of consumption over time when the condition is estimated with food consumption data from the panel study on income dynamics the results yield no evidence of habit formation at the annual frequency this finding is robust to a number of changes in the specification it also holds for several proxies for nondurables and services consumption created by combining psid variables with weights estimated from consumer expenditure survey data

sectoral solow residuals this paper presents capital utilization corrected measures of technology shocks for aggregate and disaggregated two digit standard industrial classification code industries we correct for variations in capital utilization by employing industrial electrical use as a measure of capital services in contrast the standard measures of technology shocks used in the real business cycle literature are based on economy wide data and assume that capital services are proportional to the stock of measured capital to assess the impact of these differences we contrast selected properties of the competing technology shock measures we argue that the properties of technology shocks for the manufacturing sector are quite different than those used in the rbc literature we also find that correcting for capital utilization has important implications for the properties of the solow residual

optimal monetary policy in a currency area abstract this paper investigates how monetary policy should be conducted in a two region general equilibrium model with monopolistic competition and price stickiness this framework delivers a simple welfare criterion based on the utility of the consumers that can be used to evaluate monetary policy in a currency area if the two regions share the same degree of nominal rigidity the terms of trade are completely insulated from monetary policy and the optimal outcome is obtained by targeting a weighted average of the regional inflation rates these weights coincide with the economic sizes of the region if the degrees of rigidity are different the optimal plan implies a high degree of inertia in the inflation rate but an inflation targeting policy in which higher weight is given to the inflation in the region with higher degree of nominal rigidity is nearly optimal

sectoral inflation and the phillips curve what has changed since the great recession abstract using sectoral data at a medium level of aggregation we find that disaggregated inflation rates became less responsive to aggregate unemployment around 2009 2010 the slopes of the disaggregated phillips curves diminished in many sectors including housing and some services we also document a decrease in sectoral inflation persistence suggesting an increase in the weight of the forward looking inflation expectation component and a decrease in the weight of the backward looking component

international capital mobility amongst the major industrialised countries too little or too much this paper examines capital flows among the major industrialized countries with a view to assessing m feldstein and c horioka s 1980 claim that international capital mobility is limited it argues that saving investment correlation tests are inherently flawed and proposes an alternative methodology for testing the degree of international capital mobility it finds that capital flows have been excessive in the sense that they are driven by speculative forces rather than by economic fundamentals copyright 1995 by royal economic society

can aggregation explain the persistence of inflation abstract an aggregation exercise is proposed that aims at investigating whether the fast average adjustments of the disaggregate inflation series of the euro area cpi is coherent with the slow adjustment of euro area aggregate inflation estimating a dynamic factor model for 404 inflation sub indices of the euro area cpi allows to decompose the dynamics of inflation sub indices into a part due to a common macroeconomic shock and to sector specific idiosyncratic shocks although idiosyncratic shocks dominate the variance of sectoral prices one common factor appears to be the main driver of aggregate dynamics in addition the heterogenous propagation of this common shock across sectoral inflation rates and in particular its slow propagation to inflation rates of services generates the persistence of aggregate inflation we conclude that the aggregation mechanism explains a significant amount of aggregate inflation persistence

habit formation and the present value model of the current account yet another suspect abstract in a recent paper gruber gruber j w 2004 a present value test of habits and the current account journal of monetary economics 51 1495 1507 claims that habit formation in consumption plays an important role in current account fluctuations in selected developed countries extending the present value model of the current account pvm with consumption habits in this paper however i show that the habit forming pvm is observationally equivalent to the pvm augmented with persistent transitory consumption which is induced by world real interest rate shocks based on a small open economy real business cycle soe rbc model endowed with consumption habits as well as persistent world real interest rate shocks this paper resolves the inherent identification problem of the habit forming pvm by bayesian methods to seek effects of habit formation on current account fluctuations in typical small open economies canada and the united kingdom results reveal no clear evidence that habit formation plays a crucial role in current account fluctuations

foreign aid and domestic absorption this paper introduces a new supply push instrument for foreign aid to be used together with an instrumental variable estimator that filters out unobserved common factors we use this instrument to study the effects of aid on macroeconomic ratios and especially the ratios of consumption investment imports and exports to gdp we cannot reject the hypothesis that aid is fully absorbed rather than used to build foreign reserves or exiting as capital flight nor do we find evidence of dutch disease effects aid leads to higher consumption while the evidence that it promotes investment is less robust

international evidence on the new keynesian phillips curve using aggregate and disaggregate data we present a unique empirical analysis of the properties of the new keynesian phillips curve nkpc using an international data set of aggregate and disaggregate sectoral inflation our results from panel time series estimation clearly indicate that sectoral heterogeneity has important consequences for aggregate inflation behavior heterogeneity helps to explain the overestimation of inflation persistence and underestimation of the role of marginal costs in empirical investigations of the nkpc that use aggregate data we find that combining disaggregate information with heterogeneous consistent estimation techniques helps to reconcile to a large extent the nkpc with the data

price setting in the euro area some stylized facts from individual producer price data this paper summarizes the microevidence on the setting of producer prices in the euro area the main findings are i 21 of producer prices are adjusted each month ii producer prices are changed more frequently and by smaller amounts than consumer prices even after controlling for product characteristics iii price decreases are relatively frequent iv inflation correlates positively with the difference between the frequency of price increases and decreases and v there is substantial variation in price flexibility across sectors which can be explained in part by differences in the cost structure the degree of competition and the level of sectoral inflation

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

the transmission of monetary policy in a multisector economy this article constructs and estimates a sticky price dynamic stochastic general equilibrium model with heterogeneous production sectors firms in different sectors vary in their price rigidity production technology and the combination of material and investment inputs in particular firms buy inputs from all sectors using the actual input output matrix and capital flow table of the u s economy by relaxing the standard assumption of symmetry this model allows idiosyncratic sectoral dynamics in response to monetary policy shocks the model is estimated by the generalized method of moments using sectoral and aggregate u s time series

the value of a rational expectations forecast in a risky market a theoretical and empirical approach the central focus of this paper is to develop an easily computable money metric of an agent s willingness to pay for information under risk to extend this concept to the market and to demonstrate its application in a simple twoequation econometric model of the u s fed cattle market the paper draws on previous contributions to the theory of competitive firm under price uncertainty namely rothschild and stiglitz sandmo and more recently pope 1978 1980 and pope chavas and just the latter contributions provide insight into the econometric application of the theory and into the validity of producer surplus measures of firm welfare under risk the conceptual approach presented in this paper facilitates empirical application for a restricted class of utility functions it is shown that the money metric of an agent s willingness to pay for additional information can be computed from the firm s risk averse supply or factor demand function while other studies e g hayami and peterson freebairn decanio have derived welfare estimates of the value of a fore

production growth and business cycles ii new directions abstract this paper outlines new directions for investigations of real business cycle models consideration of stochastic growth of exogenous and endogenous forms analysis of suboptimal outcomes arising due to externalities of distorting taxes and implications of labor market heterogeneity

can world real interest rates explain business cycles in a small open economy abstract while the world real interest rate is potentially an important mechanism for transmitting international shocks to small open economies much of the recent quantitative research that studies this mechanism concludes that it has little effect on output investment and net exports we re examine the importance of world real interest rate shocks using an approach that reverses the standard real business cycle methodology we begin with a small open economy business cycle model but rather than specifying the stochastic processes for the shocks and then solving and simulating the model to evaluate how well these shocks explain business cycles we use the model to back out the shocks that are consistent with the model s observable endogenous variables then we use variance decompositions to examine the importance of each shock we apply this methodology to canada and find that world real interest rate shocks can play an important role in explaining the cyclical variation in a small open economy in particular they can explain up to one third of the fluctuations in output and more than half of the fluctuations in net exports and net foreign assets

sectoral phillips curves and the aggregate phillips curve sector level phillips curves are estimated in french data there is considerable heterogeneity across sectors with vastly different estimates of the backward looking component of inflation and the duration of nominal rigidities a multi sector model of inflation dynamics is calibrated on the basis of these sectoral estimates aggregate inflation simulated on the basis of heterogeneous sectors displays comparable dynamics to actual data a comparison is drawn between the policy trade offs implied by a phillips curve based on macroeconomic estimates vs one based on a model with heterogeneous sectors the difference is sizeable

the cross sectional distribution of price stickiness implied by aggregate data we provide evidence on three mechanisms that can reconcile frequent individual price changes with sluggish aggregate price dynamics to that end we estimate a semistructural model that can extract

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

improving the accuracy of outlook price forecasts this study investigates the predictive ability of outlook hog price forecasts released by iowa state university relative to alternative time series and market forecasts under root mean squared error rmse the futures market forecast is most accurate at the first and second horizon but less accurate than iowa outlook and the other forecast methods at the third horizon in terms of the individual time series models some vector autoregressions vars and bayesian vars flexible in specification and estimation and model averaging tend to perform better than iowa outlook forecasts evidence from encompassing tests more stringent tests of forecast performance indicates that many price forecasts can add incremental information to the iowa forecast simple combinations of these models and outlook forecasts are able to reduce forecast errors by economically significant levels overall the results indicate that it is possible to provide more accurate forecasts than iowa outlook at every horizon

a sectoral analysis of price setting behavior in us manufacturing industries abstract in this paper we estimate new keynesian phillips curves nkpc for u s manufacturing industries defined at the sic two digit level over the period 1959 to 1996 this enables us to measure the extent of nominal inertia across industrial sectors a key innovation in this research is the use of intermediate goods costs rather than labor costs as a measure of marginal costs intermediate goods costs are a more significant element of costs for the firms populating our sample and are not subject to the criticism that wage rates are nonallocative we find that there is statistically significant variability in estimates of price stickiness ranging from eight months to two years we also find that estimates of backward looking price setting behavior vary with some industries characterized by 81 of pricing decisions made in a purely forward looking manner while in others only 52 of pricing decisions are made that way market concentration as captured by the herfindahl hirschman index appears to be

a producer s willingness to pay for information under price uncertainty theory and application the central focus of this paper is the development of an easily computable money metric of an agent s willingness to pay for information under risk empirical estimates of the value of information are important for obtaining insights into issues such as the informational efficiency of alternative market structures the effects of the quality of agent s conditional forecasts of market prices on the efficiency of resource use and the social profitability of information supplied by private enterprise and public agencies the paper draws on previous contributions to the theory of competitive firm under price uncertainty namely rothschild and stiglitz 8 sandmo 9 and more recently pope 5 6 and pope chavas and just 7 the latter contribution provides insight into the econometric application of the theory and into the validity of producer surplus measures of firm welfare under risk in these models the production decision is made given the producer s subjective distribution of output price the value of information in this context can be formulated using the bayesian approach which amounts to a comparison of expected utility levels from choices based on prior information with choices based on additional information contributions in this area are numerous and include those of lindley 4 winkler 10 and more recently gould 2 and hess 3 who focused on the effects of risk preferences and the nature of the distribution of random events on the value of information however the literature has given little attention to the question of deriving a money metric of an agent s willingness to pay for information under risk that can be applied to an econometric analysis of observed behavior in part the problem lies with the empirical application of bayes theorem to explain the observed behavior of risk averse agents while estimates of the agent s prior distribution of uncertain events may be obtained from observed choices or in some cases elicited directly the content of additional information the process by which additional information becomes available and whether the agent behaves

var based estimation of euler equations with an application to new keynesian pricing abstract var based estimation of euler equations exploits cross equation restrictions that the theory imposes on a vector autoregressive var process for market expectations this paper shows that sargent s 1979 a note on maximum likelihood estimation of the rational expectations model of the term structure journal of monetary economics 5 133 143 original approach of imposing these restrictions on the endogenous variable of the euler equation i e computing the rational expectations solution implies multiple solutions and is therefore impracticable the paper shows that this identification problem can be circumvented by reverse engineering the cross equation restrictions on the forcing variable of the euler equation the proposed reverse engineering approach contrasts with the conventional approach in the literature that avoids the identification problem by constraining the system formed by the euler equation and the var process to yield a unique stable rational expectations equilibrium this uniqueness condition makes little economic sense because the var process is just a reduced form approximation of true market expectations and a simulation experiment shows that imposing uniqueness can lead to severe misspecification bias the severity of this misspecification bias is illustrated in practice with an application to gali and gertler s 1999 inflation dynamics a structural econometric analysis journal of monetary economics 44 195 222 hybrid new keynesian phillips curve

the terms of trade productivity growth and the current account abstract this paper extends the analytical framework provided by glick and rogoff 1995 journal of monetary economics 35 159 192 to an economy with traded and nontraded goods and it analyzes the impact of country specific and global productivity shocks on the current account and investment each of these disturbances have different implications for the current account and investment that are largely consistent with the empirical results first the current account responds more than investment to country specific traded productivity growth second global traded productivity and country specific nontraded productivity growth have no effect on the current account but they have a significant impact on investment third the global component of nontraded productivity is negligible and has no significant impact on either the current account or investment in addition the response of the current account and investment to relative prices the terms of trade and exchange rate are insignificant this paper also discusses the potential reasons for it

present value tests of an intertemporal model of the current account abstract this paper first demonstrates that in a simple intertemporal open economy model the current account is equal to the expected decline of the present discounted value of net output of a country net output is defined as gross domestic product less the sum of investment plus government spending it then uses econometric methods for present value models to analyze the current account for four countries in two of these countries the model does a satisfactory job of explaining the current account