optimal monetary policy in an economy with inflation persistence abstract this paper studies optimal monetary policy in a model where inflation is persistent two types of price setters are assumed to exist one acts rationally given calvo type constraints on price setting the other type sets prices according to a rule of thumb this results in a phillips curve with both a forward looking term and a backward looking term the phillips curve nests a standard purely forward looking phillips curve as well as a standard purely backward looking phillips curve as special cases a cost push supply shock is derived from microfoundations by adding a time varying income tax and by making the elasticity of substitution between goods stochastic a central bank loss function for this model is derived from a second order taylor approximation of the household s welfare function optimal monetary policy for different relative values of the forward and backward looking terms is then analyzed for both the commitment case and the case of discretion

animal spirits and credit cycles in this paper we extend the behavioral macroeconomic model as proposed by de grauwe 2012 to include a banking sector the behavioral model takes the view that agents have limited cognitive abilities as a result it is rational to use simple forecasting rules and to subject the use of these rules to a fitness test agents are then driven to select the rule that performs best the behavioral model produces endogenous and self fulfilling movements of optimism and pessimism animal spirits our main result is that the existence of banks intensifies these movements creating a greater scope for booms and busts thus banks do not create but amplify animal spirits we find that increases in the equity ratios of banks tend to reduce the importance of animal spirits over the business cycle the other policy conclusion we derive from our results is that the central bank has an important responsibility for stabilising output output stabilization is an instrument to tame the animal spirits this has the effect of improving the trade off between inflation and output volatility

the fisher hypothesis and the forecastability and persistence of inflation abstract for the period 1860 to 1939 the simple correlation of the u s commercial paper rate with the contemporaneous inflation rate is 0 17 the corresponding correlation for the period 1950 to 1979 is 0 71 this paper attributes this apparent change in the fisher relation to differences in the stochastic process of inflation rather than a change in any structural relationship between interest rates and expected inflation contrary to recent claims in the literature there is little evidence of inflation non neutrality in data from the pre world war i period

central bank design abstract starting with a blank slate how could one design the institutions of a central bank for the united states this paper explores the question of how to design a central bank drawing on the relevant economic literature and historical experiences while staying free from concerns about how the fed got to be what it is today or the short term political constraints it has faced at various times the goal is to provide an opinionated overview that puts forward the trade offs associated with different choices and identifies areas where there are clear messages about optimal central bank design

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

information rigidities and the news adjusted output gap a vector autoregressive model of actual output and expected output obtained from surveys is used to test for information rigidities and to provide a characterisation of output dynamics that accommodates these information structures news on actual and expected outputs is decomposed to identify innovations understood to have short lived effects and these are used with the model to derive a news adjusted output gap measure the approach is applied to us data over 1970q1 2014q2 and the new gap measure is shown to provide a good leading indicator of inflation

optimal price level drift under commitment in the canonical new keynesian model in both the canonical and many extended versions of the new keynesian model optimal monetary policy under commitment implies price level stationarity as long as expectations are rational we show that this is no longer the case if the central bank and private agents make decisions before observing current shocks the optimal amount of price level drift in response to unexpected innovations to inflation is quantitatively important this result has important implications for monetary policy including the design of the optimal loss function for the central bank if it cannot commit to its future policies a la fois dans la version canonique du nouveau modele keynesien et de ses versions etendues la politique monetaire optimale quand il y a engagement implique qu il y aura stationnarite du niveau des prix aussi longtemps que les anticipations sont rationnelles on montre que ce n est plus le cas si la banque centrale et les agents prives prennent des decisions avant d observer les chocs courants le montant optimal de la derive du niveau des prix en reponse aux innovations non anticipees dans l inflation est quantitativement important ce resultat a des implications importantes pour la politique monetaire y compris le design d une fonction de perte optimale pour la banque centrale si elle ne peut pas s engager a poursuivre ses politiques dans l avenir

optimal disinflation in new keynesian models abstract central bankers conventional wisdom suggests that nominal interest rates should be raised to attain a lower inflation target in contrast i show that the standard new keynesian monetary model with rational expectations and full credibility predicts that nominal interest rates should be decreased to attain this goal real interest rates however are virtually unchanged these results also hold in recent vintages of new keynesian models with sticky wages price and wage indexation and habit formation in consumption

what determines households inflation expectations theory and evidence from a household survey the purpose of the present paper is to study how households form inflation expectations using a novel survey dataset of italian households we extend the existing inattentiveness literature by incorporating explicitly inflation targets and distinguishing between aggregate and disaggregate dynamics based on demographic groups we also consider both the short and long run dynamics as households update their inflation expectations while we find clear distinctions between the various demographic groups behavior households tend to absorb professionals forecast the short run dynamics also indicate they not only overreact when updating their expectations but also adjust asymmetrically to any perceived momentum change of future inflation

getting to the top of mind how reminders increase saving we provide evidence from field experiments with three different banks that reminder messages increase commitment attainment for clients who recently opened commitment savings accounts messages that mention both savings goals and financial incentives are particularly effective whereas other content variations such as gain versus loss framing do not have significantly different effects nor do we find evidence that receiving additional late reminders has an additive effect these empirical results do not map neatly into existing models so we provide a simple model where limited attention to exceptional expenses can generate undersaving that is in turn mitigated by reminders data as supplemental material are available at http dx doi org 10 1287 mnsc 2015 2296 this paper was accepted by teck hua ho behavioral economics

monetary policy for rationally inattentive economies with staggered price setting the paper examines the optimal monetary policy when firms are constrained by information processing capability and infrequent price adjustments firms information processing limit gives rise to imperfect knowledge about macroeconomic aggregates and endogenous information learning contingent on the monetary policy staggered price setting introduces the observed price duration and additional policy tradeoffs resulting from the interactions between nominal rigidities and imperfect information processing the integrated model implies an optimal policy that commits to complete price stabilization in response to natural rate shocks but not in response to markup shocks in the presence of markup shocks it is optimal for the central bank to focus on price stabilization in the initial periods following markup shocks and shifts the emphasis to output gap stabilization later moreover larger information capacity stronger complementarities and more persistent shocks require more aggressive price stabilization in the short run

do actions speak louder than words household expectations of inflation based on micro consumption data survey data on household expectations of inflation are routinely used in economic analysis yet it is not clear how accurately households are able to articulate their expectations in survey interviews we propose an alternative approach to recovering households expectations of inflation from their consumption expenditures we show that these expectations measures have predictive power for consumer price index cpi inflation they are better predictors of cpi inflation than household survey responses and more highly correlated with professional inflation forecasts except for highly educated consumers consistent with the view that more educated consumers are better able to articulate their expectations we also document that households inflation expectations respond to inflation news as measured by the unpredictable component of inflation predictions in the survey of professional forecasters the response to inflation news tends to increase with households level of education consistent with the existence of constraints on household s ability to process this information

the time varying nairu and its implications for economic policy the nairu the unemployment rate consistent with a constant rate of inflation is estimated in this paper as a parameter allowed to vary over time value is determined in an econometric model where the inflation rate depends on its past values demand and supply shocks the nairu estimated for the gdp deflator varies over the past forty years within 5 4 to 6 5 percent its estimated value for the most recent quarter 1996 q2 is 5 6 percent the nairu has declined in recent years in response to global competition immigration other factors weakening labor s bargaining position and the rapidly declining prices of computers and other electronics

learning over the business cycle policy implications abstract this paper studies the policy implications of the endogeneity of information about the state of the economy the business cycle can be made less noisy and more efficient by incentivizing firms to vary their pricing and production decisions more with their beliefs about the state of the economy this calls for countercyclical taxes complemented by a monetary policy that leans against the wind the optimal policies trade off allocative efficiency for informational efficiency

price level targeting and stabilisation policy a survey this paper surveys recent articles on the costs and benefits of price level targeting focusing its use as a tool for stabilisation policy it discusses how price level targeting can affect the short run trade off between output and inflation variability by influencing inflation expectations it reviews how assigning an explicit price level target to a central bank that is unable to commit to its future policies can improve economic performance it surveys other potential benefits and costs among the costs it underlines the importance of perfectly rational expectations for the optimality of price level targeting and an exacerbation of the time inconsistency problem

information rigidity and the expectations formation process a simple framework and new facts we propose a new approach to test the full information rational expectations hypothesis which can identify whether rejections of the null arise from irrationality or limited information this approach quantifies the economic significance of departures from the null by quantifying the underlying degree of information rigidity applying this approach to u s and international data of professional forecasters and other agents yields pervasive evidence consistent with models of imperfect information furthermore the proposed approach sheds new light on policies such as inflation targeting and those leading to the great moderation affecting expectations finally we document evidence of state dependence in the expectations formation process

price level targeting vs inflation targeting a free lunch price level targeting without base drift and inflation targeting with base drift are compared under commitment and discretion with persistence in unemployment price level targeting is often said to imply more short run inflation variability and thereby more employment variability than inflation targeting counter to this conventional wisdom under discretion a price level target results in lower inflation variability than an inflation target if unemployment is at least moderately persistent a price level target also eliminates the inflation bias under discretion and as is well known reduces long term price variability society may be better off assigning a price level target to the central bank even if its preferences correspond to inflation targeting a price level target thus appears to have more advantages than commonly acknowledged

inflation and output in new keynesian models with a transient interest rate peg a familiar result in the canonical dynamic new keynesian dnk model is that policymakers constrained by the zero bound can improve outcomes by promising to keep rates low after the zero bound is not binding we examine a general class of interest rate pegs in a variety of dnk models standard versions of the model produce counterintuitive reversals where the effect of the interest rate peg can switch from highly expansionary to highly contractionary for modest changes in the length of the interest rate peg this unusual behavior does not arise in sticky information models of the phillips curve

inflation forecast targeting implementing and monitoring inflation targets abstract inflation targeting is shown to imply inflation forecast targeting the central bank s inflation forecast becomes an explicit intermediate target inflation forecast targeting simplifies both implementation and monitoring of monetary policy the weight on output stabilization determines how quickly the inflation forecast is adjusted towards the inflation target money growth or exchange rate targeting is generally inferior than inflation targeting and leads to higher inflation variability commitment to target rules may be better than commitment to instrument rules

long run consumption risk and asset allocation under recursive utility and rational inattention we study the portfolio decision of a household with limited information processing capacity rational inattention or ri in a setting with recursive utility we find that rational inattention combined with a preference for early resolution of uncertainty could lead to a significant drop in the share of portfolios held in risky assets even when the departure from standard expected utility with rational expectations is small in addition we show that the equilibrium equity premium increases with the degree of inattention because inattentive investors with recursive utility face greater long run risk and thus require higher compensation in equilibrium our results are robust to the presence of correlation between the equity return and the ri induced noise and the presence of non tradable labor income

price setting with quadratic adjustment costs experimental evidence abstract we test the price setting behavior of firms using the rotemberg 1982 model in order to explain puzzles in the new keynesian phillips curve nkpc for our tests we conducted experiments that adapt the model into an individual decision making problem we find systematic deviations in price setting according to the subjects degree of information acquisition subjects rarely make use of past information on the other hand subjects that decide to acquire relatively little information about future desired prices tend to overweight their own past set price when they set prices we study the impact of this heterogeneous price setting behavior for theoretically derived forward looking phillips curves our estimated nkpcs are in line with the empirical literature the deviations from theoretical predictions in our nkpcs are driven by the less informed subjects

monetary policy for inattentive economies we offer a contribution to the analysis of optimal monetary policy we begin with a critical assessment of the existing literature arguing that most work is based on implausible models of inflation output dynamics we then suggest that this problem may be solved with some recent behavioral models which assume that price setters are slow to incorporate macroeconomic information into the prices they set a specific such model is developed and used to derive optimal policy in response to shocks to productivity and aggregate demand optimal policy is price level targeting base drift in the price level which is implicit in the inflation targeting regimes currently used in many central banks is not desirable in this model when shocks to desired markups are added optimal policy is flexible targeting of the price level that is the central bank should allow the price level to deviate from its target for a while in response to these supply shocks but it should eventually return the price level to its target path optimal policy can also be described as an elastic price standard the central bank allows the price level to deviate from its target when output is expected to deviate from its natural rate

exogenous information endogenous information and optimal monetary policy most of the analysis of optimal monetary policy is conducted with the calvo model this paper studies optimal monetary policy when the slow adjustment of the price level is due to imperfect information by decision makers in firms we consider two models a model with exogenous dispersed information and a rational inattention model in the model with exogenous dispersed information complete stabilization of the price level is optimal after aggregate productivity shocks but not after markup shocks by contrast in the rational inattention model complete stabilization of the price level is optimal both after aggregate productivity shocks and after markup shocks moreover in the model with exogenous dispersed information there is no value from commitment to a future monetary policy by contrast in the rational inattention model there is value from commitment to a future monetary policy because then the private sector can trust the central bank that not paying attention to certain variables is optimal

price and output stability under price level targeting it is commonly believed that a monetary policy that targets the price level reduces the long term variability of the price level but only at the cost of increased variability of both inflation and output we develop a model in which the one step ahead variance of output and the price level are lower under price level targeting than under inflation targeting this increased stability under price level targeting works through an interest rate channel that to our knowledge has not previously been emphasized in the literature surprisingly if the sensitivity of demand to the real rate of interest is high enough then the variance of inflation can also be lower under price level targeting than under inflation targeting

optimal monetary policy with imperfect common knowledge we study optimal nominal demand policy in a flexible price economy with monopolistic competition where firms have imperfect common knowledge about the shocks hitting the economy information imperfections emerge endogenously because firms are assumed to have finite shannon capacity to process information we then ask how policy that minimizes a quadratic objective in output and prices depends on firms processing capacity when price setting decisions of firms are strategic complements we find that policy should nominally accommodate white noise mark up shocks for a large range of capacity values this fi nding is robust to the policy maker observing shocks imperfectly or being uncertain about firms processing capacity when mark up shocks are persistent accommodation may even have to increase in the medium term but has to decrease in the long run thereby generating a hump shaped price response and a slow reduction in output instead when prices are strategic substitutes policy tends to react with nominal demand contractions to mark up shocks in addition there might exist discontinuities between common knowledge equilibria and equilibria with small amounts of imperfect common knowledge

is increased price flexibility stabilizing redux abstract what are the implications of increased price flexibility on output volatility in a simple dsge model we show analytically that more flexible prices always amplify output volatility for supply shocks and also amplify output volatility for demand shocks if monetary policy does not respond strongly to inflation more flexible prices often reduce welfare even under optimal monetary policy if full efficiency cannot be attained our results extend to a model with both sticky information and wages we estimate a quantitative dsge model using bayesian methods and using counterfactual experiments show that our results from the simple model continue to apply

the consequences of the us doj s antitrust activities a macroeconomic perspective do the antitrust law enforcement activities of the us department of justice act as exogenous technology shocks or as markup shocks limiting market power and promoting economic growth we analyze annual time series data from 1947 to 2003 on three measures of federal antitrust intervention the ratio of the antitrust division s budgetary expenditures to gdp as well as the numbers of civil and criminal antitrust cases instituted we find that changes in the levels of these policy variables act like negative technology shocks and that the negative effects are transitory antitrust policy generates no subsequent offsetting increases in productivity

investment dynamics with information costs investment in physical capital at the micro level is infrequent and large or lumpy the most common explanation for this is that firms face non convex physical adjustment costs the model developed in this paper shows that information costs make investment lumpy at the micro level even in the absence of non convex adjustment costs when collecting and processing information is costly the firm optimally chooses to do it sporadically and to be inactive most of the time this behavior results in infrequent and possibly large capital adjustments the model fits plant level investment rate moments well and it also matches some higher order moments of aggregate investment rates keywords investment dynamics information costs inattentiveness lumpy investment jel classification d21 d83 d92 e22

relative price changes as aggregate supply shocks this paper proposes a theory of supply shocks or shifts in the short run phillips curve based on relative price changes and frictions in nominal price adjustment when price adjustment is costly firms adjust to large shocks but not to small shocks and so large shocks have disproportionate effects on the price level therefore aggregate inflation depends on the distribution of relative price changes inflation rises when the distribution is skewed to the right and falls when the distribution is skewed to the left we show that this theoretical result explains a large fraction of movements in postwar u s inflation moreover our model suggests measures of supply shocks that perform better than traditional measures such as the relative prices of food and energy

the time series properties of aggregate consumption implications for the costs of fluctuations the properties of the stochastic process followed by aggregate consumption affect the estimates of the costs of fluctuations this paper pursues two approaches to modeling consumption dynamics and measuring how much society dislikes fluctuations one statistical and one economic the statistical approach estimates the properties of consumption and calculates the costs of having consumption fluctuating around its mean growth the paper finds that persistence is a crucial determinant of the costs and that the high persistence in the data severely distorts conventional measures it shows how to compute valid estimates and confidence intervals the economic approach uses a calibrated model of optimal consumption and measures the costs of eliminating income shocks this uncovers a further cost of uncertainty through its impact on precautionary savings and investment the two approaches lead to costs of fluctuations that are higher than the common wisdom between 0 5 and 5 of per capita consumption jel e32 e21 e60

the role of media for consumers inflation expectation formation the full information rational expectations model is clearly rejected by the data the expectation formation process has therefore important implications for macroeconomic outcomes we examine how consumers react to information provided by the media by taking into account that this information is imperfect we show that information rigidities play a role empirically intensive news reporting improves the accuracy of consumers inflation expectations because they receive more information however this effect depends on the tone of the news if news are badly toned the effect reverts

assessing environmental dependence using asset and income measures evidence from nepal understanding rural environmental dependence in a rural population is an important factor in the framing of environmental policy with the dual aim of tackling poverty and conserving nature firstly this study compares the assessment of environmental dependence between poverty groupings based on income and asset measures using a composite asset index we were able to distinguish the asset poor from the asset non poor we then combined income data with the asset index enabling us to disentangle the stochastic and structural nature of poverty the distribution of poor and non poor households based on income measures was significantly different from that based on asset measures the income poor are substantially more dependent on environmental resources than the income non poor about 15 difference while strikingly minimal difference was observed in environmental dependence between the asset poor and non poor less than 2 difference the level of environmental dependence between the poor and non poor households differs with the choice of welfare measure and combining two of these measures to identify wealth groups provides policy makers with better insight on the variations in environmental dependence

when little things mean a lot on the inefficiency of item pricing laws abstract item pricing laws ipls require a price tag on every item sold by a retailer we study ipls and assess their efficiency by quantifying their costs and comparing them to previously documented benefits on the cost side we posit that ipls should lead to higher prices because they increase the costs of pricing and price adjustment we test this prediction using data collected from large supermarket chains in the tri state area of new york new jersey and connecticut we find that ipl store prices are higher by about 20 25 per item on average as a control we use data from stores that use electronic shelf labels and find that their prices fall between ipl and no ipl store prices we compare the costs of ipls to existing measures of the benefits and find that the costs are an order of magnitude higher than the upper bound of the estimated benefits

price level versus inflation targeting with financial market imperfections this paper compares price level path targeting pt with inflation targeting it in a sticky price dynamic general equilibrium model augmented with imperfections in both the debt and equity markets

monetary policy endogenous inattention and the volatility trade off this paper addresses the output price volatility puzzle by studying the interaction of optimal monetary policy and agents beliefs we assume that agents choose their information acquisition rate by minimizing a loss function that depends on expected forecast errors and information costs endogenous inattention is a nash equilibrium in the information processing rate although a decline of policy activism directly increases output volatility it indirectly anchors expectations which decreases output volatility if the indirect effect dominates then the usual trade off between output and price volatility breaks down this provides a potential explanation for the great moderation that began in the 1980 s

formation of rationally heterogeneous expectations this paper models expectation formation by taking into account that agents may produce heterogeneous expectations because of informational frictions and differing levels of a capacity to process information we show that there are two general classes of steady states within this framework those where strictly dominated forecasting rules vanish and those heterogeneous states where a positive proportion of agents uses a more costly perfect foresight we demonstrate that intrinsic heterogeneity can also arise in a model where the forecasting rules are not equally costly and do not exhibit identical performance in the long run

monetary policy when potential output is uncertain understanding the growth gamble of the 1990s abstract t he fed kept interest rates low and essentially unchanged during the late 1990s despite a booming economy and record low unemployment these interest rates were accommodative by historical standards nonetheless inflation remained low how did the fed succeed in sustaining rapid economic growth without fueling inflation and inflationary expectations in retrospect it is evident that the productive capacity of the economy increased yet as events unfolded there was uncertainty about the expansion of the capacity of the economy and therefore about the sustainability of the fed s policy this paper provides an explanation for the success of the fed in accommodating growth with stable inflation in the late 1990s it shows that if the central bank is committed to reverse policy errors it makes because of unwarranted optimism inflation can remain in check even if the central bank keeps interest rates low because of this optimism in particular a price level target which is a simple way to model a commitment to offset errors can serve to anchor inflation even if the public does not share the central bank s optimism about shifts in potential output the paper shows that price level targeting is superior to inflation targeting in a wide range of situations the paper also provides econometric evidence that in contrast to earlier periods the fed has recently put substantial weight on the price level in setting interest rates moreover it shows that cpi announcement surprises lead to reversion in the price level finally it provides textual evidence that alan greenspan puts relatively more weight on the price level than inflation

does self fulfilment of the inflation expectation exist abstractthis study examines the causal relationship between the actual and expected inflation in the u s using the bootstrap granger full sample causality test and sub sample rolling window estimation test to illustrate the self fulfilment of inflation expectations the full sample result indicates that there is a bidirectional causality between the actual and expected inflation showing the possibility of self fulfilment of inflation expectations which illustrates that inflation is driven by inflation expectation however considering structural changes in two series we find that the short run causal nexus between the actual and expected inflation using full sample data are fraudulent by adopting a time varying rolling window approach to revisiting the dynamic causal relationships this article identifies that the actual inflation has both positive and negative impacts on the expected inflation in distinct sub periods nevertheless inflation expectation exerts only negative effects on the actual inf

inflation dynamics a cross country investigation we document that persistent and lagged inflation with respect to output is a world wide phenomenon in that these short run inflation dynamics are highly synchronized across countries in particular the average cross country correlation of inflation is significantly and systematically stronger than that of output while the cross country correlation of money growth is essentially zero we investigate whether standard monetary models driven by monetary shocks are consistent with the empirical facts we find that neither the new keynesian sticky price model nor the sticky information model can fully explain the data an independent contribution of the paper is to provide a simple solution technique for solving general equilibrium models with sticky information

consumer inertia choice dependence and learning from experience in a repeated decision problem abstract understanding when and how individuals think about real life problems is a central question in economics this paper studies the role of inertia inattention state dependence and learning the empirical setting is a tariff experiment when optional measured tariffs for local telephone calls were introduced unanticipatedly we find that consumers tend to align their choices of tariff and telephone use levels correctly despite low potential savings mistakes are not permanent as individuals actively engage in tariff switching in order to reduce the monthly cost of telephone service ignoring unobservable heterogeneity and the endogeneity of past choices would have reversed these results

forecasting the real prices of crude oil using forecast combinations over time varying parameter models abstract in this paper we forecast real prices of crude oil using real time forecast combinations over time varying parameter tvp models with single predictor we reveal the significant predictability at all horizons up to 24 months the mean squared predictive error reduction over the benchmark of no change forecast is as high as 17 and the directional accuracy as high as 0 645 a combination with tvp models is found to generate more accurate forecasts than the same combination with constant coefficient models because the forecast errors of individual tvp models are correlated at a lower degree we also evaluate the forecasting performance in the framework of density forecasting our results indicate that the benchmark model can be significantly outperformed by forecast combination at the horizons longer than 3 months

optimal monetary policy when information is market generated endogenous i e market generated signals observed by firms have crucial implications for monetary policy when information is endogenous firms gather a demand signal from their market that is both real and nominal as a result the traditional surprise channel of monetary policy is absent instead monetary policy works through a signaling channel as it affects firms information through the demand signal the optimal policy is then the signaling policy i e the policy that maximizes the information content of the demand signal in our setup the signaling policy targets a positive correlation between money supply and prices which emphasizes the natural response of prices to real shocks on the contrary in the more traditional case of exogenous information optimal monetary policy would stabilize prices as it acts through the surprise channel we show that the signaling policy is optimal regardless of the amount of attention that firms pay to central bank communication

on inflation and output with costly price changes a simple unifying result this paper determines the real effects of credible disinflation when price setting is staggered the results are surprising a fairly quick disinflation causes a boom this finding suggests that nominal price rigidity alone does not explain why disinflation is costly in actual economies this abstract was borrowed from another version of this item

price points and price rigidity abstract we study the link between price points and price rigidity using two data sets weekly scanner data and internet data we find that 9 is the most frequent ending for the penny dime dollar and ten dollar digits the most common price changes are those that keep the price endings at 9 9 ending prices are less likely to change than non 9 ending prices and the average size of price change is larger for 9 ending than non 9 ending prices we conclude that 9 ending contributes to price rigidity from penny to dollar digits and across a wide range of product categories retail formats and retailers

strategic interaction among heterogeneous price setters in an estimated dsge model abstract we consider a dynamic stochastic general equilibrium model dsge in which firms follow one of four price setting regimes sticky prices sticky information rule of thumb or full information flexible prices the parameters of the model including the fraction of each type of firm are estimated by matching the moments of the observed variables of the model to those found in the data we find that sticky price firms and sticky information firms jointly account for over 80 of firms in the model we compare the performance of our hybrid model to pure sticky price and sticky information models along various dimensions including monetary policy implications

sticky information and model uncertainty in survey data on inflation expectations abstract this paper compares three reduced form models of heterogeneity in survey inflation expectations on the one hand we specify two models of forecasting inflation based on limited information flows of the type developed in mankiw and reis 2002 sticky information versus sticky prices a proposal to replace the new keynesian phillips curve quarterly journal of economics 117 4 1295 1328 we present maximum likelihood results that suggests a sticky information model with a time varying distribution structure is consistent with the michigan survey of inflation expectations we also compare these sticky information models to the endogenous model uncertainty approach in branch 2004 the theory of rationally heterogeneous expectations evidence from survey data on inflation expectations economic journal 114 497 non parametric evidence suggests that models which allow the degree of heterogeneity to change over time provide a better fit of the data

the phillips curve the persistence of inflation and the lucas critique evidence from exchange rate regimes comment we present evidence from the united states and the united kingdom that the persistence of price inflation is significantly higher under managed exchange rate regimes than under gold based fixed exchange rate regimes these differences are also reflected in expectations augmented phillips curves we use a two country macro model with forward looking price setters to demonstrate that higher monetary accommodation of inflation and exchange rate accommodation of inflation differentials increase inflation persistence the evidence does not contradict this hypothesis it supports the hypothesis of forward looking price setters and highlights the empirical significance of the lucas critique jel e31 e42 f33

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

the nairu unemployment and monetary policy this paper examines the precision of conventional estimates of the nairu and the role of the nairu and unemployment in forecasting inflation the authors find that although there is a clear empirical phillips relation the nairu is imprecisely estimated forecasts of inflation are insensitive to the nairu and there are other leading indicators of inflation that are at least as good as unemployment this suggests deemphasizing the nairu in public discourse about monetary policy and instead drawing on a richer variety of leading indicators of inflation