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

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

the principal agent relationship with an informed principal the case of private values we analyze the principal agent relationship when the principal has private information as a three stage noncooperative game contract proposal acceptance refusal and contract execution we assume that the information does not directly affect the agent s payoff private values equilibrium exists and is generically locally unique moreover it is pareto optimal for the different types of principal the principal generically does strictly better than when the agent knows her information equilibrium allocations are the walrasian equilibria of an economy where the traders are different types of principal and exchange the slack on the agent s individual rationality and incentive compatibility constraints

interpreting the macroeconomic time series facts the effects of monetary policy existing theory and evidence on the effects of monetary policy are reviewed substantial room for disagreement among economists remains new evidence based on multivariate time series studies of several countries is presented while certain patterns in the data consistent with effective monetary policy are strikingly similar across countries others particularly the tendency of interest rate increases to predict high inflation are harder to reconcile with effective monetary policy

business cycle dynamics under rational inattention we develop a dynamic stochastic general equilibrium dsge model with rational inattention and compare its predictions to data households and decision makers in firms have limited attention and optimally allocate their attention rational inattention is the only source of slow adjustment the model matches the empirical impulse responses to monetary policy shocks and aggregate technology shocks at the same time profit losses and utility losses from inattention are very small furthermore it matters whether one uses this model or a conventional dsge model for policy analysis

optimal monetary policy with durable consumption goods abstract we document that the durable goods sector is much more interest sensitive than the nondurables sector and then investigate the implications of these sectoral differences for monetary policy we formulate a two sector general equilibrium model that is calibrated both to match the sectoral responses to a monetary shock derived from our empirical var and to imply an empirically realistic degree of sectoral output volatility and comovement while the social welfare function involves sector specific output gaps and inflation rates the performance of the optimal policy rule can be closely approximated by a simple rule that targets a weighted average of aggregate wage and price inflation in contrast a rule that stabilizes a more narrow measure of final goods price inflation performs poorly in terms of social welfare

strategic control of growth in a system of cities abstract this paper provides an analysis of the supply restriction model of growth controls growth controls in such a model harm consumers while enriching landowners and they will only be adopted if landowners have political power in the model this power is manifested in the city government s use of a social welfare that takes both landlord and consumer welfare into account since cities cannot be small if the supply restriction inherent in growth controls is to have an impact strategic interactions must be considered in the analysis of city choices a general model is presented and an extended example based on leontief preferences is then considered comparative static analysis of nash equilibria in the leontief case shows that perturbations of preferences or other characteristics of a single city can have important spillover effects that alter the choices of all cities in the region

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

to give or to forgive aid versus debt relief is generalized debt relief an effective development strategy or should assistance be tailored to countries characteristics to answer this question the authors build a simple model in which recipient governments reveal their creditworthiness if donors offer them to choose between aid and debt relief since offering such a menu is costly it is preferred by donors only when the cost of assistance is low and the probability that an indebted country is creditworthy is high enough for lower probabilities and higher costs of assistance donors prefer a policy of only debt relief very limited aid is the preferred policy only for high costs of assistance and low probabilities that the government is creditworthy

multilateral and bilateral loans versus grants issues and evidence this paper examines a wide range of issues relating to the mix between loans and grants as well as the degree of concessionality of loans a number of empirical tests are carried out based on annual panel data over 1970 to 1999 for 22 donor countries and 72 recipient countries based on the tests we observe that for bilateral donors past grant loan mix and hence reflows from past transfers do not influence the volume of current resource transfers our tests also show that the rate of official borrowing by the recipients and by deduction the extent of their past debt burden is positively influenced by the extent of the concessionality of such loans irrespective of whether it is in the form of subsidised interest rates or longer grace periods the paper concludes with a review of the circumstances in which grants soft loans and non concessional loans might have their respective comparative advantage as well as a discussion of the need so as to overcome the negative incentive problems of soft loans for a typical concessional loan package to be separated into two constituent parts this would enable the recipient to be given the grant component and the option to take from the non concessional loan component as much as desired

counterpart funding requirements and the foreign aid procyclicality puzzle official development assistance is a key source of external finance in many developing countries a striking feature of these aid flows is their positive correlation with business cycles in recipient countries this pattern is puzzling in that it reinforces recipients already strong and costly macroeconomic fluctuations we propose a simple model of investment financing and aid provision under asymmetric information that rationalizes such a pattern we assume that donor agencies and recipient governments value projects differently and that donors know less than recipients do about project characteristics we show that donors can make a recipient government identify high return projects by requiring that the latter contribute some of its own funds to projects providing these matching grants or counterpart funds is less affordable for recipients during economic downturns which leads to aid procyclicality our model produces aid contracts consistent with those used by aid agencies rationalizes observed aid patterns and yields a rich set of testable empirical predictions

the micro macro disconnect of purchasing power parity abstract this paper reconciles the persistence of aggregate real exchange rates with the faster adjustment of international relative prices in microeconomic data error correction model estimates indicate that a different mix of shocks drives international price deviations at the microeconomic level and that dynamic adjustment works through arbitrage in the goods market rather than the foreign exchange market when half lives are estimated conditional on a common set of estimated macro shocks we find that micro relative prices exhibit every bit as much persistence as aggregate real exchange rates these results challenge theories of real exchange rate persistence based on sticky prices and heterogeneity across goods

budget support versus project aid a theoretical appraisal should donors interested in the effectiveness of developmental programmes rely on conditional budget support or on project aid to answer this question we present a model in which only a subset of developmental expenditures can be subject to conditionality we show that budget support is preferable to project aid when the preferences of donors and recipients are aligned and when assistance is small relative to the recipients own resources furthermore when donors cannot observe the recipient s type they may impose higher levels of conditionality to separate committed governments from uncommitted ones

debt relief for poor countries conditionality and effectiveness this paper studies the effectiveness of debt relief to stimulate economic growth in the most heavily indebted poor countries we develop a neoclassical framework with a conflict of interest between the altruistic donor and the recipient government and model conditionality as an imperfectly enforceable dynamic contract in contrast to the recent practice of fully cancelling debt optimal incentive compatible conditionality is accompanied by a concessionality level that implies a combination of subsidized loans and outright grants the optimal concessionality level depends on the recipient s access to international financial markets and on the strength of the conflict of interest incentive compatible transfers with optimal concessionality levels generate substantial welfare gains if the donor does not implement the optimal concessionality level and provides subsidized loans only then the effectiveness of transfers decreases in the long run with severe welfare implications in contrast transfers are less effective in the short run if the donor offers outright grants only

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

reset price inflation and the impact of monetary policy shocks abstract many business cycle models use a flat short run phillips curve due to time dependent pricing and strategic complementarities to explain fluctuations in real output but in doing so these models predict unrealistically high persistence and stability of us inflation in recent decades we calculate reset price inflation based on new prices chosen by the subsample of price changers to dissect this discrepancy we find that the models generate too much persistence and stability both in reset price inflation and in the way reset price inflation is converted into actual inflation our findings present a challenge to existing explanations for business cycles jel e31 e52

firms and aggregate dynamics abstract we investigate the role of permanent and transitory shocks for firms and aggregate dynamics we find that permanent shocks to productivity and permanent shifts in the composition of output explain at least four fifths of firms dynamics however these permanent shocks are almost uncorrelated across firms and are therefore less relevant for aggregate dynamics transitory shocks on the other hand are not very important at the firm level but they account for most of the volatility of aggregate hours and output because they are significantly correlated across firms finally we try to make some progress on the interpretation of the shocks

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

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

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

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

assessing monetary policy in the euro area a factor augmented var approach in order to overcome the omitted information problem of small scale vector autoregression var models this study combines the var methodology with dynamic factor analysis and assesses the effects of monetary policy shocks in the euro area in the period during which there is a single monetary policy using the factor augmented vector autoregressive favar approach of bernanke et al 2005 we summarize the information contained in a large set of macroeconomic time series with a small number of estimated factors and use them as regressors in recursive vars to evaluate the impact of the nonsystematic component of the european central bank s ecb s actions overall our results suggest that the inclusion of factors in the var allows us to obtain a more coherent picture of the effects of monetary policy innovations both by achieving responses easier to understand from the theoretical point of view and by increasing the precision of such responses moreover this framework allows us to compute impulse res

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

factor analysis of a large dsge model summary we study the workings of the factor analysis of high dimensional data using artificial series generated from a large multi sector dynamic stochastic general equilibrium dsge model the objective is to use the dsge model as a laboratory that allows us to shed some light on the practical benefits and limitations of using factor analysis techniques on economic data we explain in what sense the artificial data can be thought of having a factor structure study the theoretical properties of the principal components estimates of the factor space investigate the substantive reason s for the good performance of diffusion index forecasts and assess the quality of the factor analysis of highly disaggregated data in all our exercises we explain the precise relationship between the factors and the basic macroeconomic shocks postulated by the model copyright 2012 john wiley sons ltd

product warranties and double moral hazard this article explores a model of warranties in which moral hazard problems play a key role the goal is to understand the important characteristics of warranties including their provision of incomplete insurance and the relationship between product quality and coverage we analyze a model in which buyers and sellers take actions that affect a product s performance since these actions are not cooperatively determined an incentives problem arises we characterize the optimal warranty contract and undertake comparative statics to determine the predicted correlation of warranty coverage and product quality

yesterday s bad times are today s good old times retail price changes are more frequent today than in the 1890s this paper documents differences in the nominal rigidity of retail prices across two 28 month periods 1889 91 and 1997 99 the most striking finding is that prices changed much less frequently in 1889 91 in the late 1800s when price changes did occur they were smaller on average and more narrowly distributed with fewer small or large price changes further price changes were more permanent 100 plus years ago these differences are consistent with a high occurrence of temporary price shocks and a higher cost of changing prices in 1889 91 than in 1997 99

integrating sticky prices and sticky information abstract understanding the relationship between nominal and real variables most notably inflation and cyclical output is one of the fundamental questions of economics toward this understanding we develop a model that integrates sticky prices and sticky information a dual stickiness model we find that both rigidities are present in u s data we also show that the dual stickiness model s closest competitor is the hybrid new keynesian model for both models current inflation depends in part on last period s inflation the former model achieves this dependence endogenously through the interaction of the two rigidities rather than through backward looking behavior u s data support the dual stickiness model over the hybrid model because lagged expectations terms appear in the former s inflation euler equation finally we show that it is quantitatively important to distinguish between the two by simulating a dynamic equilibrium model under each of the two inflation equations

gradualism in aid and reforms abstract dynamic strategic interaction between an international donor and a recipient government is analyzed to review the efficacy of aid conditionality for governance reforms in ldcs it is shown that irrespective of whether the donor can fully commit to the aid program or not for maximal improvement in governance the aid should be disbursed in increments with each subsequent tranche being conditional on prior reforms demonstrating aid gradualism while the attraction of future aid incentivizes authorities to push through reforms these reforms in turn also make aid diversion less feasible further under full commitment the optimal aid package may involve offering scope for interim aid diversion to the elite for long term improvement in governance with such aid diversion being more likely to happen when the total aid budget is large with only partial commitment so that time consistency requires the donor to reconfigure aid in each round it is shown that a interim aid diversion is no longer viable and b both aid and reforms exhibit strong gradualism or what is known as the starting small and grow later principle in commitment models

aid conditionality and military expenditure reduction in developing countries models of asymmetric information this paper analyzes problems of implementing noneconomic conditionality such as military expenditure reduction in the granting of foreign aid given the presence of asymmetric information the authors present two conceptually separate principal agent models to capture the stylized facts of multilateral and bilateral aid negotiations respectively the first model is an application of the problem of adverse selection when there is more than one type of principal donor with varying objectives the second model extends moral hazard to double moral hazard where neither principal nor agent recipient can fully observe or verify each other s strategies copyright 1995 by royal economic society

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

macroeconomic forecasting using diffusion indexes this article studies forecasting a macroeconomic time series variable using a large number of predictors the predictors are summarized using a small number of indexes constructed by principal component analysis an approximate dynamic factor model serves as the statistical framework for the estimation of the indexes and construction of the forecasts the method is used to construct 6 12 and 24 monthahead forecasts for eight monthly u s macroeconomic time series using 215 predictors in simulated real time from 1970 through 1998 during this sample period these new forecasts outperformed univariate autoregressions small vector autoregressions and leading indicator models