sticky prices and monetary policy evidence from disaggregated us data this paper disentangles fluctuations in disaggregated prices due to macroeconomic and sectoral conditions using a factor augmented vector autoregression estimated on a large data set on the basis of this estimation we establish eight facts 1 macroeconomic shocks explain only about 15 of sectoral inflation fluctuations 2 the persistence of sectoral inflation is driven by macroeconomic factors 3 while disaggregated prices respond quickly to sector specific shocks their responses to aggregate shocks are small on impact and larger thereafter 4 most prices respond with a significant delay to identified monetary policy shocks and show little evidence of a price puzzle contrary to existing studies based on traditional vars 5 categories in which consumer prices fall the most following a monetary policy shock tend to be those in which quantities consumed fall the least 6 the observed dispersion in the reaction of producer prices is relatively well explained by the degree of market power 7 prices in sectors with volatile idiosyncratic shocks react rapidly to aggregate monetary policy shocks 8 the sector specific components of prices and quantities move in opposite directions

inflation persistence alternative interpretations and policy implications in this paper i consider the policy implications of two alternative structural interpretations of observed inflation persistence which correspond to two alternative specifications of the new keynesian phillips curve nkpc the first specification allows for some degree of intrinsic persistence by way of a lagged inflation term in the nkpc the second is a purely forward looking model in which expectations farther into the future matter and coefficients are time varying in this specification most of the observed inflation persistence is attributed to fluctuations in the underlying inflation trend which are a consequence of monetary policy rather than a structural feature of the economy with a simple quantitative exercise i illustrate the consequences of implementing monetary policy assuming a degree of intrinsic persistence that differs from the true one the results suggest that the costs of implementing a stabilization policy when the policymaker overestimates the degree of intrinsic persistence are potentially higher than the costs of ignoring actual structural persistence the result is more clear cut when the policymaker minimizes a welfare based loss function

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

the less volatile u s economy a bayesian investigation of timing breadth and potential explanations using a bayesian model comparison strategy we search for a volatility reduction in u s real gross domestic product gdp growth within the postwar sample we find that aggregate real gdp growth has been less volatile since the early 1980s and that this volatility reduction is concentrated in the cyclical component of real gdp sales and production growth in many of the components of real gdp display similar reductions in volatility suggesting the aggregate volatility reduction does not have a narrow source we also document structural breaks in inflation dynamics that occurred over a similar time frame as the gdp volatility reduction

can we explain inflation persistence in a way that is consistent with the microevidence on nominal rigidity this paper adopts the impulse response methodology to under stand inflation persistence it has often been argued that existing models of pricing fail to explain the persistence that we observe we adopt a common general framework which allows for an explicit modelling of the distribution of contract lengths and for different types of price setting we also evaluate how far the theories are consistent with recent evidence on price and wage rigidity we find that allowing for a distribution of durations can take us a long way to solving the puzzle of inflation persistence but not all the way yet

inflation persistence in central and eastern european countries this article studies inflation persistence with time varying coefficient autoregressions for 12 central european countries in comparison with the united states and the euro area we find that inflation persistence tends to be higher in times of high inflation since the oil price shocks inflation persistence has declined both in the united states and the euro area in most central and eastern european countries for which our study covers 1993 2012 inflation persistence has also declined with the main exceptions of the czech republic slovakia and slovenia where persistence seems to be rather stable our findings have implications for the conduct of monetary policy and for a possible membership in the euro area among the two time varying coefficient methods we use our results favour the flexible least squares smoother over the kalman smoother we also conclude that the ols estimate of an autoregression is likely upward biased relative to the time average of time varying parameters when the paramete

the predictive content of the output gap for inflation resolving in sample and out of sample evidence this paper evaluates potential explanations for the sometimes poor forecasting performance of the phillips curve one explanation is that out of sample metrics are noisy or equivalently have relatively low power another potential explanation is instability in the coefficients of the model to assess these forces this paper compares sample forecasting results to results from bootstrap simulations of models that either assume stability or allow breaks in the coefficients of the model this analysis indicates that a significant portion of the weakness of the out of sample evidence is attributable to power limitations but instabilities in the coefficients on the output gap also play a role

oil price shocks and the macroeconomy this paper examines the impact of oil price shocks and attempts to explain why the rise in oil prices up to 2008 had little impact on the world economy it makes three main arguments first that oil prices have never been as important as is popularly thought second that the most important route through which oil prices affect output is monetary policy when oil prices pass through to core inflation monetary authorities raise interest rates slowing growth based on the second argument the third argument is that high oil prices have not reduced growth in recent years because they no longer pass through to core inflation so the monetary tightening previously seen in response to high oil prices is absent it also argues that oil prices had little impact on the global recession of 20089

why has u s inflation become harder to forecast we examine whether the u s rate of price inflation has become harder to forecast and to the extent that it has what changes in the inflation process have made it so the main finding is that the univariate inflation process is well described by an unobserved component trend cycle model with stochastic volatility or equivalently an integrated moving average process with time varying parameters this model explains a variety of recent univariate inflation forecasting puzzles and begins to explain some multivariate inflation forecasting puzzles as well

disaggregate evidence on the persistence of consumer price inflation this paper uses disaggregate inflation data spanning all of consumption to examine i the persistence of disaggregate inflation relative to aggregate inflation ii the distribution of persistence across consumption sectors and iii whether persistence has changed assuming mean inflation to be unchanged disaggregate persistence inflation is consistently below aggregate persistence taking into account an early 1990s shift in mean inflation identified by break tests yields much lower estimates of both aggregate and disaggregate persistence for 1984 2002 but with the mean break average disaggregate persistence is actually as great as aggregate inflation persistence a factor model provides a natural framework for interpreting the relationship between aggregate and disaggregate persistence copyright 2006 john wiley sons ltd

sticky information phillips curves european evidence we estimate the sticky information phillips curve model of mankiw and reis 2002 using survey expectations of professional forecasters from four major european economies our estimates imply that in ation expectations in france germany and the united kingdom are updated about once a year in italy about once each six months

stabilization theory and policy 50 years after the phillips curve this paper discusses the impact of a w h phillips seminal work in macroeconomic stabilization policy on subsequent developments in that field we begin by reviewing the various stabilization rules adopted by phillips and show how these relate to optimal stabilization rules that emerge from linear quadratic optimization problems most of the early st abilization literature was associated with backward looking variables the development of rational expectations in the 1960 s and 1970 s posed a challenge for stabilization policy this arose from the role of forward looking inflationary expectations in the phillips curve and the effect this had on the design of optimal stabilization rules through issues such as the lucas critique and the time consistency of policy we also briefly comment on a long standing debate pertaining to the merits of fixed policy rules versus discretionary or optimal policy the latter part of the paper discusses some of the more contemporary aspects of stabilization policy thereby serving to illustrate the durability of phillips contributions

vent for surplus a case of mistaken identity 1 introduction adam smith s theory of the gains from international trade has caused a great deal of controversy and confusion among economic theorists and historians of economic thought on the one hand smith is interpreted as arguing that foreign trade that vents surplus products is necessary to maintain or generate a full utilization of a country s resources on the other hand smith throughout much of the wealth of nations advocates a system of natural or perfect liberty which insures that markets operate to efficiently allocate productive resources across industries so as to direct that industry that its produce may be of the greatest value smith 1994 p 484 but if markets allocate resources to their most productive uses how are we to make sense of such stark statements that surpluses in any given sector must be sent abroad without such exportation a part of the productive labour of the country must cease and the value of its annual produce diminish smith 1994 p 403 many economists write off the apparent discrepancy between a vent for surplus gain from trade and a system of natural liberty and suggest it is a flaw in smith s logic j s mill states it is in truth a surviving relic of mercantile theory mill 1987 p 579 others have attempted to vindicate smith s theory of the gains from trade arguing that the vent for surplus is meant to apply only to underdeveloped economies myint 1958 1977 staley 1973 or where goods are produced jointly kurz 1992 blecker 1997 develops an approach that reconciles the vent for surplus gain with other aspects of smith s trade theory for economies that are subject to an unnatural and retrograde order smith 1994 p 412 these arguments although significant fail to explain why smith appears to have applied the vent for surplus gain from trade to all economies involved in trade including otherwise nondistorted developed nations trading in single product goods this paper offers an alternative interpretation of the vent for surplus argument that is both consistent with trade between developed economies and with smith s system of natural liberty we show how a vent for surplus gain from trade can exist in the context of trade between developed nations by emphasizing the link between this gain from trade and smith s theory of productive and unproductive labor we argue that a move away from a freely developed pattern of trade will cause market prices to deviate from natural prices shifting resources from more to less productive uses causing the value of national output to fall smith never argues that capital and productive labor will become unemployed without sufficient vents this formulation combined with an understanding of smith s rhetoric shows that smith s theory of the gains from trade is completely compatible with his system of natural liberty and suggests a more coherent theory of the gains from trade than is typically attributed to smith in this interpretation of smith the term vent for surplus is a misnomer 2 vent for surplus and the proposed defense of smith smith s treatment of the gains from trade is almost without exception thought to consist of two separate arguments in chapter i book iv smith states between whatever places foreign trade is carried on they all of them derive two distinct benefits from it it carries out that surplus part of the produce of their land and labour for which there is no demand among them and brings back in return for it something else for which there is a demand it gives a value to their superfluities by exchanging them for something else which may satisfy part of their wants and increase their enjoyments by means of it the narrowness of the home market does not hinder the division of labor in any particular branch of art or manufacture from being carried to the highest perfection by opening a more extensive market for whatever part of the produce of their labour may exceed the home consumption it encourages them to improve its productive powers and to augment its annual produce to the utmost and thereby to increase the real revenue and wealth of the society

disposable income unemployment inflation and state spending in a dynamic political economic model this paper formulates a medium term macroeconomic model of disposable income unemployment inflation and state spending proposes a theory of qualitative choice to explain electoral popularity in terms of these variables and develops three approaches to the formulation of political economic policy the first approach is static sets the tax rate to reconcile the interests of various pressure groups and yields a political trade off between the private and public sector the second approach relies on maximizing the probability of winning the next election and gives rise to a political business cycle unless the electorate votes strategically the implications of crowding out of private investment under alternative monetary rules autonomous behaviour of the state bureaucracy and tax indexation for the political business cycle are also examined the third approach analyzes the objective of maximizing the uninterrupted length in office it yields a short run political cycle superimposed on a longer cycle

macroeconomic forecasting and structural change the aim of this paper is to assess whether explicitly modeling structural change increases the accuracy of macroeconomic forecasts we produce real time out of sample forecasts for inflation the unemployment rate and the interest rate using a time varying coefficients var with stochastic volatility tv var for the us the model generates accurate predictions for the three variables in particular for inflation the tv var outperforms in terms of mean square forecast error all the competing models fixed coefficients vars time varying ars and the na ove random walk model these results are also shown to hold over the period commonly referred to as the great moderation

confidence intervals for half life deviations from purchasing power parity existing point estimates of half life deviations from purchasing power parity ppp around 3 5 years suggest that the speed of convergence is extremely slow this article assesses the degree of uncertainty around these point estimates by using local to unity asymptotic theory to construct confidence intervals that are robust to high persistence in small samples the empirical evidence suggests that the lower bound of the confidence interval is between four and eight quarters for most currencies which is not inconsistent with traditional price stickiness explanations however the upper bounds are infinity for all currencies so we cannot provide conclusive evidence in favor of ppp either

the optimal intertemporal choice of inflation and unemployment an analysis of the steady state and transitional dynamics abstract this paper analyzes the optimal intertemporal choice of inflation and unemployment rates in two versions of a simple dynamic macro model in the first of these the real wage remains fixed while in the second the real wage is permitted to adjust endogenously the implications for the long run as well as the transitional dynamic adjustment paths are discussed in detail in the long run the optimal policy will drive the economy to its natural rate of unemployment accompanied by a steady rate of inflation which can be described in terms of a number of parameters characterizing the economy and the preferences of the policy maker the transitional dynamic adjustment path also depends upon these parameters among which the rate of time discount is particularly important

nominal price rigidity money supply endogeneity and business cycles abstract this paper investigates the ability of nominal price rigidity to explain the co movement of inflation with the cyclical component of output observed in the post war u s data a dynamic general equilibrium model is constructed with the introduction of monopolistic competition and nominal price rigidity in a standard real business cycle model allowing for an endogenous money supply rule it is then demonstrated that sticky price models can explain the observed associations between movements in inflation and output much better than flexible price models this result depends little on whether money supply is assumed to be endogenous or not

time varying yield curve dynamics and monetary policy monetary policy the yield curve and the private sector behaviour of the us economy are modelled as a time varying structural vector autoregression the monetary policy shocks of the early 1980s explain a large portion of the persistence of inflation and the level of the term structure changes in inflation expectations implied by the yield curve account for the persistence of the federal funds rate failures of the expectations hypothesis are rare and coincided with the credibility building of paul volcker s fed tenure at the beginning of the 1980s and the sequence of consecutive policy rate cuts around the time of the early 1990s recession copyright 2009 john wiley sons ltd

high exchange rate volatility and low pass through abstract two specifications of an open economy model are shown to generate high exchange rate volatility and low exchange rate pass through erpt in the model price discrimination causes erpt to be incomplete in both the short and the long run in the short run a small amount of nominal rigidities is enough to reduce erpt sharply still exchange rate depreciation worsens the terms of trade consistent with the evidence possible biases from omitted variables and measurement error in the erpt empirical literature due to data limitations are investigated using model generated time series estimates of erpt coefficients can be quite different from true parameters and are sensitive to the shocks driving the economies estimates can nonetheless detect key structural features of the models

low inflation pass through and the pricing power of firms abstract recently there has been a significant decline in the degree to which firms pass through changes in costs to prices a decline that is frequently characterized as a reduction in the pricing power of firms the decline appears to be associated with the decline in inflation in many countries the decline has important implications for monetary policy because it affects both forecasts of inflation and the effects of changes in monetary policy on inflation some have argued that the decline in pricing power helped to keep inflation low in the face of apparently strong demand pressures in the united states in the late 1990s this paper puts forth the view that the decline in pass through or pricing power is due to the low inflation environment that has recently been achieved in many countries first a microeconomic model of price setting is used to show that lower pass through is caused by lower perceived persistence of cost changes evidence is then presented showing that inflation is positively correlated with persistence of inflation suggesting that the low inflation itself has caused the low pass through an economy wide model consistent with the micromodel is then presented to illustrate how such changes in pricing power affect output and inflation dynamics in favorable ways but can disappear quickly if monetary policy and expectations change

does inflation targeting matter a reassessment this paper uses a number of identification approaches using instrumental variables assumptions about heteroscedasticity and panel fixed effects to estimate the effect of inflation targeting on inflation generally it finds the effect is small and insignificant

inflation in mozambique empirical facts based on persistence seasonality and breaks this article investigates inflation in mozambique using long range dependence lrd techniques in monthly data from december 1995 to october 2012 two important features of the data are analysed persistence and seasonality looking at aggregated and disaggregated data the stability of the parameters across the sample is also investigated the results indicate a high degree of persistence in the data along with a strong seasonal pattern policy implications are discussed

a time series approach to test a change in inflation persistence the mexican experience when a central bank commits credibly to a nonaccommodative monetary policy observed inflation should be a stationary process in countries where for a variety of reasons the determinants of inflation could lead it to follow a nonstationary process the adoption of a credible disinflationary programme should therefore induce a fundamental change in the stochastic process governing inflation and in particular should diminish its persistence this article studies the time series properties of both inflation and core inflation during the 1995 2006 period for the mexican economy using recently developed techniques to detect a change in the persistence of economic time series consistently with the adoption of an inflation targeting framework the results suggest that inflation in mexico seems to have indeed switched from a nonstationary to a stationary process around the end of year 2000 or the beginning of 2001

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

investigating inflation persistence across monetary regimes under inflation targeting estimates of the indexation parameter in hybrid new keynesian phillips curves are either equal to zero or very low in the united kingdom canada sweden and new zealand analogous results hold for the euro area under the european monetary union and for switzerland under the new monetary regime under stable regimes with clearly defined nominal anchors inflation appears to be purely forward looking these results question the notion that the intrinsic inflation persistence found in post wwii u s data is structural in the sense of lucas carnegie rochester conference series on public policy 1 1976 19 46 and suggest that hardwiring inflation persistence in macroeconomic models is potentially misleading

the dynamics of inflation a study of a large number of countries over the last twenty years the statistical properties of inflation persistence has been the subject of intense investigation and debate without reaching a unanimous conclusion yet in this article we attempt to shed further light to this debate using a battery of econometric techniques in order to provide robust evidence on the degree of inflation persistence and whether this has changed during the period in which several countries have followed inflation targeting regimes or new monetary regimes we consider the inflation rates of thirty developed and emerging economies using quarterly data for the period 1958 to 2007 which include alternative monetary policy regimes the coefficient of the inflation parameter is estimated by ordinary least squares ols autoregressive moving average arma and autoregressive fractionally integrated moving average arfima models furthermore the grid bootstrap median unbiased mub estimator approach developed by hansen 1999 is used to estimate the finite sample ols

inflation targeting and exchange rate pass through this paper analyzes how endogenous imperfect exchange rate pass through affects inflation targeting optimal monetary policies in a new keynesian small open economy the paper shows that an inverse relation exists between the pass through and the insulation of the economy from foreign and monetary policy shocks and that imperfect pass through tends to decrease the variability of the terms of trade furthermore with cpi inflation targeting in the short run delayed pass through constrains monetary policy more than incomplete pass through and interest rate smoothing amplifies this effect when the pass through decreases the variability in economic activity tends to rise and the trade off between the stabilization of cpi inflation and output worsens in direct relation to how strictly the central bank is targeting cpi inflation in contrast with domestic inflation targeting optimal monetary policy is not constrained and opposite results occur consequently imperfect pass through favors the choice of domestic to cpi inflation targeting

exploring international differences in inflation dynamics abstract standard closed economy dsge models have difficulty replicating the persistence of inflation we use a multicountry dataset to establish some empirical regularities on persistence and volatility of aggregate consumer prices for 135 countries since 1993 we find both persistence and volatility to be low high in developed developing countries relative to the full sample average this pattern is also observed in low high inflation countries we then employ a two country dsge framework to investigate the extent to which structural open economy features such as incomplete exchange rate pass through the existence of nontraded goods and international financial market incompleteness can help in replicating the persistence and volatility of consumer prices our simulation results indicate that the model can replicate the degree of inflation persistence seen in the data for both developed and developing countries but cannot generate the low levels of volatility observed in developed economies

nonconcavity and proper optimal periodic control this paper deals with optimal periodic control problems in an economic context the main result is that nonconcavity is necessary for proper periodicity of optimal solution paths the theoretical results are illustrated by an unemployment and inflation trade off model

survey measures of expected inflation and the inflation process the accuracy of inflation forecasts obtained from household and professional surveys has deteriorated noticeably of late to the extent that a simple autoregressive specification outperforms survey forecasts the decline in absolute and relative accuracy has taken place at about the same time as an apparent change in the inflation process projections of household forecasts on realized inflation suggests that households have not recognized this change for the professionals projections of expected inflation on headline inflation have changed but on core inflation have not by contrast projections of realized headline inflation on core have changed sharply

the persistence of inflation in the united states abstract has the persistence of inflation in the united states changed since 1965 we estimate the persistence of inflation over time using different measures and estimation procedures and we produce confidence intervals for our estimates as well as formal tests of unchanged persistence we find that inflation persistence has been high and approximately unchanged in the u s over our sample period we reconcile our results with other studies that reached different conclusions

what explains the great moderation in the u s a structural analysis this paper investigates what has caused output and inflation volatility to fall in the u s using a small scale structural model using bayesian techniques and rolling samples there are instabilities in the posterior of the parameters describing the private sector the policy rule and the variance of the shocks results are robust to the specification of the policy rule changes in the parameters describing the private sector are the largest but those of the policy rule and the covariance matrix of the shocks explain the changes most jel e52 e47 c53

dynamics of persistence in international inflation rates characteristics of inflation play a key role in policy formulation and market analysis several studies have analyzed inflation persistence and reached diverging conclusions in this paper we investigate the dynamics of inflation persistence using fractionally integrated processes and find that there has been a clear decline in inflation persistence in the united states over the past two decades we also show that the presence of fractional integration in inflation successfully explains previous diverging results lastly we provide some international comparisons to examine the extent to which there has been a commensurate decline in inflation persistence in the other g7 economies

optimal monetary policy in an open economy this paper analyzes the optimal intertemporal tradeoff between inflation and output in an open economy under perfect foresight the announcement of the optimal plan may or may not generate an initial jump in the exchange rate that depends upon the real adjustment costs which such unanticipated changes impose on the economy in the case that such jumps occur the question of time consistency of the optimal policy arises a time consistent solution is obtained provided i the policy maker is not too myopic ii the adjustment costs associated with the jump in the exchange rate are of an appropriate form the optimal monetary rule is derived and properties of this rule as well as the overall optimal adjustment of the economy are discussed

demand and structural change in adam smith s view of economic progress previous studies suggest that demand forces as well as widely accepted supply side factors work in smith s historical account of economic development expanding on this line of inquiry and yet giving corrections of misinterpretations this article claims that endogenous demand is at play in smith s theory of natural progress providing a historical case study of early modern england for an illustration of the demand based model of natural progress smith drew attention to the dynamics of growth with respect to the role of demand and the changing sectoral structure of economies in the model of natural progress as well as in that of historical progress in this vein smith s approach to economic development differs from hume s historical account of it first it is significant that smith was concerned with a change in income distribution and expenditure pattern brought about by economic growth with the general expansion of income changes in patterns of income distribution and consumption i e a larger share of wages and profits in national income at later stages of development that favour manufactured items boost economic growth and lead an agrarian economy to move towards manufacturing and commercial economies second it is now worth noticing that along with the progress of wealth an endogenous demand grounded on a part played by socio psychological power as distinct from material motives furnishes a taste for manufactured goods more than for agricultural goods

inflation dynamics in the u s global but not local mean reversion a stylized fact of u s inflation dynamics is one of extreme persistence and possible unit root behavior if so the implications for macroeconomics and monetary policy are somewhat unpalatable our econometric analysis proposes a parsimonious univariate representation of the inflation process for the last 60 years the nonlinear exponential smooth autoregressive the empirical results confirm a number of the key features such as global stationarity local unit root behavior and lower persistence in the post 1983 period than in the pre 1983 period we compare the forecasting ability of our model with that of competing univariate models and find that the nonlinear model outperforms the linear autoregressive model in the pre 1983 period and the random walk in the post 1983 period at short horizons

adam smith on foreign trade a note on the vent for surplus argument this note is exclusively concerned with the joint products foundation of adam smith s vent for surplus argument with relatively fixed proportions in which the joint products are produced it cannot be presumed that these proportions match those in which the products are domestically required for use foreign trade is thus directly beneficial to a nation since it allows its producers to dispose of some of the superfluous amounts of the products in exchange for goods produced abroad that are demanded domestically copyright 1992 by the london school of economics and political science

the heterogeneous great moderation in this paper i show that a more accurate analysis of the great moderation leads to interesting and novel findings about macroeconomic volatility dynamics in the last decades the main empirical result of the paper is that the great moderation has diversely affected macroeconomic volatility at different horizons short run business cycle and medium run i refer to this phenomenon as the heterogeneous great moderation across frequencies i formally test these findings by defining a frequency domain structural break test that detects the presence of a break in the variance of real macroeconomic variables at different frequencies i derive its asymptotic and small sample properties and i apply it to u s macroeconomic variables to provide statistical evidence that the great moderation is mainly confined to short run fluctuations i finally use a dsge model to investigate which elements of the model can generate the heterogeneous great moderation i find that whereas just a decline of the magnitude of the shocks and a change in the monetary policy cannot replicate the stylized facts accounting for the increased persistence of the exogenous disturbances is the key feature for generating the heterogeneous great moderation

monopolistic competition and the effects of aggregate demand how important is monopolistic competition to an understanding of the effects of aggregate demand on output we ask the question at three levels can monopolistic competition by itself explain why aggregate demand movements affect output can it together with other imperfections generate effects of aggregate demand in a way that perfect competition cannot if so can it give an accurate account of the response of the economy to aggregate demand movements the answers are no yes and yes

sticky goods prices flexible asset prices monopolistic competition and monetary policy a monetary general equilibrium asset pricing model with sticky goods prices is developed goods prices are set by monopolistically competitive firms that maximize stock market value equilibria with underutilization of resources excess capacity in some states result in contrast to previous monetary asset pricing models the degree of competition affects capacity utilization monetary policy can affect output and resource utilization in addition to real asset prices depending upon the amount of information available to the monetary authority

the structural dynamics of u s output and inflation what explains the changes we examine the dynamics of u s output and inflation using a structural time varying coefficients vector autoregression there are changes in the volatility of both variables and in the persistence of inflation but variations are statistically insignificant technology shocks explain changes in output volatility real demand disturbances variations in the persistence and volatility of inflation we detect important time variations in the transmission of technology shocks to output and demand shocks to inflation and significant changes in the variance of technology and of monetary policy shocks

international capital mobility and unemployment dynamics empirical evidence from oecd countries we use a panel of 20 oecd countries over a 30 year period to estimate the implications of international capital mobility for unemployment we nd that the increase in capital ows since the mid 1980s has contributed to an ampli cation of the impulse response of unemployment to country speci c shocks and to a fall in the persistence of unemployment in response to the same shocks

the magnitude of menu costs direct evidence from large u s supermarket chains we use store level data to document the exact process of changing prices and to directly measure menu costs at five multistore supermarket chains we show that changing prices in these establishments is a complex process requiring dozens of steps and a nontrivial amount of resources the menu costs average 105 887 year per store comprising 0 70 percent of revenues 35 2 percent of net margins and 0 52 price change these menu costs may be forming a barrier to price changes specifically 1 a supermarket chain facing higher menu costs due to item pricing laws that require a separate price tag on each item changes prices two and one half times less frequently than the other four chains 2 within this chain the prices of products exempt from the law are changed over three times more frequently than the products subject to the law in principle fixed costs of changing prices can be observed and measured in practice such costs take disparate forms in different firms and we have no data on their magnitude so the theory can be tested at best indirectly at worst not at all alan blinder 1991 p 90

monetary policy regime shifts and inflation persistence abstract using bayesian methods we estimate a markov switching new keynesian msnk model that allows shifts in the monetary policy reaction coefficients and shock volatilities with u s data we find that a more aggressive monetary policy regime was in place after the volcker disinflation and before 1970 than during the great inflation of the 1970s our estimates also indicate that a low volatility regime has been in place during most of the sample period after 1984 we connect the timing of the different regimes to a measure of inflation persistence

has the inflation process changed does it change inflation has been low in many countries for at least a decade but have inflation processes changed in ways that would help make low inflation permanent using both aggregate and disaggregated inflation data we find that the means of inflation processes have become smaller over the past two decades and that allowing for these changes in the mean their persistence has not declined much changes in monetary policy frameworks and recessions appear to have contributed to a reduction in the mean of inflation but do not appear to have a meaningful impact on persistence and there is some evidence that the shifts in inflation expectations are the proximate cause of the changes in the mean of inflation these findings suggest that policy makers should focus on maintaining credibility and carefully monitoring inflation expectations for any indication that they are rising stephen g cecchetti and guy debelle

has monetary policy become more effective we investigate the implications of changes in the structure of the u s economy for monetary policy effectiveness estimating a vector autoregression over the pre and post 1980 periods we provide evidence of a reduced effect of monetary policy shocks in the latter period we estimate a structural model that replicates well the economy s response in both periods and perform counterfactual experiments to determine the source of the change in the monetary transmission mechanism and in the economy s volatility we find that by responding more strongly to inflation expectations monetary policy has stabilized the economy more effectively in the post 1980 period

the unnatural and retrograde order adam smith s theories of trade and development reconsidered this paper extends some new interpretations of adam smith s theory of trade by reconciling what have previously been regarded as his three separate theories of absolute advantage market widening and vent for surplus however this reconstruction of smith s trade theory is shown to be inconsistent with his theory of the natural stages of economic development in book iii of the wealth of nations rather the interpretation of smith s trade theory proposed here is more consistent with smith s analysis of the unnatural and retrograde order which was the actual development path of western europe

convergence of inflationary shocks evidence from the caribbean in this paper we aim to shed some light on the inflation dynamics in the caribbean we analyse the inflation rates for twelve countries using various time series methods the results show that the inflation rates are mean reverting processes and that there is evidence of a convergence club in inflation rates within the area which contradicts previous studies our contribution implies a high degree of similarity in the dynamics of our target countries inflation rates

monetary policy housing rents and inflation dynamics in this paper we study the effect of monetary policy shocks on housing rents our main finding is that in contrast to house prices housing rents increase in response to contractionary monetary policy shocks we also find that after a contractionary monetary policy shock rental vacancies and the homeownership rate decline this combination of results suggests that monetary policy may affect housing tenure decisions own versus rent in addition we show that with the exception of the shelter component all other main components of the consumer price index cpi either decline in response to a contractionary monetary policy shock or are not responsive these findings motivated us to study the statistical properties of alternative measures of inflation that exclude the shelter component we find that measures of inflation that exclude shelter have most of the statistical properties of the widely used measures of inflation such as the cpi and the price index for personal consumption expenditures but have higher standard deviations and react more to monetary policy shocks finally we show that the response of housing rents accounts for a large proportion of the price puzzle found in the literature

resuscitating the ad hoc loss function for monetary policy analysis working with micro founded loss functions to derive and analyse optimal policy ensures consistency with the model used and overcomes the misleading prescriptions that result from using exogenous ad hoc loss functions however when allowance is made for the fact that different theories of inflation persistence can result in the same observationally equivalent hybrid new keynesian phillips curve such conclusions may no longer hold each theory implies its own loss function and will therefore result in different policy prescriptions in this paper i analyse the welfare consequences of using ad hoc loss functions versus the micro founded but potentially incorrect policy objectives

the dynamics of persistence in us inflation abstract using a recently developed time series approach we show that post wwii us inflation became highly persistent during the great inflation period and then switched back to a low persistence process during 1984 and has remained stationary until the present day

has euro area inflation persistence changed over time this paper analyzes the stability over time of the econometric process for euro area inflation since 1970 focusing in particular on the behavior of the so called persistence parameter the sum of the coefficients on the lagged dependent variables perhaps surprisingly in light of the lucas critique our principal finding is that there appears to be relatively little instability in the parameters of the euro area inflation process full sample estimates of the persistence parameter are generally close to 1 and we fail to reject the hypothesis that this parameter has been stable over time we discuss how these results provide some indirect evidence against rational expectations models with strong forward looking elements such as the new keynesian phillips curve

us inflation dynamics on long range data in this article we evaluate inflation persistence in the united states using long range monthly and annual data the importance of inflation persistence is crucial to policy authorities and market participants since the level of inflation persistence provides an indication on the susceptibility of the economy to exogenous shocks departing from classic econometric approaches found in the relevant literature we evaluate inflation persistence through the nonparametric hurst exponent within both a global and a rolling window framework moreover we expand our analysis to detect the potential existence of chaos in the data generating process in order to enhance the robustness of our conclusions overall we find that inflation persistence is high from 1775 to 2013 for the annual data set and from february 1876 to may 2014 in monthly frequency respectively especially from the monthly data set the rolling window approach allows us to derive that inflation persistence has reached to historically high leve

inflation persistence and monetary policy a simple result abstract this note explores the interaction between monetary policy and structural inflation persistence in the context of a new keynesian inflation model we solve the monetary policy problem under discretion and find that optimal monetary policy is a function of the relative weight on the output gap in the welfare theoretic stabilization objective the responsiveness of inflation to fluctuations in the output and the perceived degree of inflation persistence within our simple framework we find that underestimating inflation persistence always reduces inflation variability

the macroeconomics of trend inflation most macroeconomic models for monetary policy analysis are approximated around a zero inflation steady state but most central banks target an inflation rate of about 2 percent many economists have recently proposed even higher inflation targets to reduce the incidence of the zero lower bound constraint on monetary policy in this survey we show that the conduct of monetary policy should be analyzed by appropriately accounting for the positive trend inflation targeted by policymakers we first review empirical research on the evolution and dynamics of u s trend inflation and some proposed new measures to assess the volatility and persistence of trend based inflation gaps we then construct a generalized new keynesian model that accounts for a positive trend inflation in this model an increase in trend inflation is associated with a more volatile and unstable economy and tends to destabilize inflation expectations this analysis offers a note of caution regarding recent proposals to address the existing zero lower bound problem by raising the long run inflation target jel e12 e31 e32 e52 e58

structural changes in the us economy is there a role for monetary policy this paper investigates the contribution of monetary policy to the changes in output growth and inflation dynamics in the us we identify a policy shock and a policy rule in at ime varying coefficients var using robust sign restrictions the transmission of policy shocks has been relatively stable the variance of the policy shock has decreased over time but policy shocks account for a small fraction of the level and of the variations in inflation and output growth volatility and persistence we find little evidence of a significant increase in the long run response of the interest rate to inflation a more aggressive inflation policy in the 1970s would have produced large output growth costs

perceived inflation persistence this article constructs and estimates a measure called perceived inflation persistence that can be used to determine if professional forecasters inflation forecasts indicate there has been a change in inflation persistence this measure is built via the implied autocorrelation function that follows from the estimates obtained using a forecaster specific state space model findings indicate that u s perceived inflation persistence has changed since the mid 1990s with more consensus among forecasters at lower levels of persistence when compared to the autocorrelation function for actual inflation forecasters typically react less to shocks to inflation than the actual inflation data would suggest

phillips curves and unemployment dynamics a critique and a holistic perspective the conventional wisdom that inflation and unemployment are unrelated in the long run implies that these phenomena can be analysed by separate branches of economics the macro literature tries to explain inflation dynamics and estimates the nairu the labour macro literature tries to explain unemployment dynamics and determine the real economic factors that drive the natural rate of unemployment we show that the orthodox view that the new keynesian phillips curve is vertical in the long run and that it cannot generate substantial inflation persistence relies on the implausible assumption of a zero interest rate in the light of these results we argue that a holistic framework is needed to jointly explain the evolution of inflation and unemployment

the role of automatic stabilizers in the u s business cycle most countries have automatic rules in their tax and transfer systems that are partly intended to stabilize economic uctuations this paper measures how eective they are at lowering the volatility of u s economic activity we identify seven potential stabilizers in the data and include four theoretical channels through which they may operate in a business cycle model calibrated to the u s data the model is used to compare the volatility of output in the data with counterfactuals where some or all of the stabilizers are shut down our rst nding is that proportional taxes like sales property and corporate income taxes contribute little to stabilization our second

inflation and monetary dynamics in the us a quantity theory approach in this article we investigate the long run link between inflation and money growth in the united states since 1960 a measure of the long run inflation trend is constructed which bears the interpreation of monetary inflation rate and is directly related to the excess nominal money growth process money growth less output growth as postulated by the quantity theory consistent with the memory characteristics of the series their fractional integration and cointegration properties are taken into account in empirical modelling the proposed measure is then compared with several existing measures of core inflation aimed at capturing long run inflation dynamics but unrelated to money growth the monetary long run inflation rate performs well in out of sample forecasting exercises especially over a 2 3 year horizon yielding valuable information to monetary policymakers

inflation output and markup dynamics with forward looking wage and price setters abstract medium scale new keynesian models are sometimes criticized for their use of backward looking wage and price setting mechanisms and for assuming several types of disturbances including some that would be difficult to interpret economically we propose a dsge model with purely forward looking wage and price setters and parsimoniously chosen disturbances our model emphasizes an interplay between production firms networking and working capital firms can use working capital to finance all or a fraction of their outlays on production factors and use the output of other firms as an input in a what is often called a roundabout production structure our model generates a response of inflation which is mute on impact of a monetary policy shock but highly persistent and very hump shaped afterwards it also yields a large contract multiplier for output two times larger than the one implied by a model relying on indexation only we also show that the response of the price markup can be positive on impact of an expansionary monetary policy shock which differs from the standard countercyclical markup channel emphasized in conventional new keynesian models in contrast to models relying on indexation to past inflation our model produces non inertial responses of inflation to productivity and investment shocks a finding which is broadly consistent with the existing var evidence