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on Dynamic General Equilibrium |
| By: | Guangling Liu; Marrium Mustapher |
| Abstract: | This study examines how different policy mix regimes affect the impact of recent US contractionary monetary policy on South Africa's inflation and business cycles. The study uses a small open economy New Keynesian Dynamic Stochastic General Equilibrium model with an integrated fiscal block to analyse these effects. Regime M (active monetary policy) is more effective at containing the spillover effects but leads to higher public debt, requiring larger future fiscal surpluses. |
| Keywords: | Monetary and fiscal policy, Spillovers, New Keynesian models, Dynamic stochastic general equilibrium model, Policy coordination |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:unu:wpaper:wp-2024-68 |
| By: | Similan Rujiwattanapong (Waseda University) |
| Abstract: | Standard search theory suggests that (1) job search intensity increases with the relative gain from searching, and that (2) job search intensity increases the job finding probability. Firstly, this paper presents new empirical findings that are at odds with these theoretical predictions when workers are categorised by their unemployment insurance (UI) history. Unemployed workers who either are currently receiving or used to receive UI search harder than those who never take up UI during their unemployment spells. What’s more, despite their higher search intensity, those with a UI history have a lower job finding probability. Subsequently, I introduce unproductive and inefficient job search, consistent with these empirical findings, to an otherwise standard stochastic equilibrium search-and-matching model with endogenous search intensity. Three key results emerge from these job search imperfections: (1) aggregate search intensity becomes acyclical leading to an underestimated matching efficiency, (2) the general equilibrium effects of UI extensions and the labour market fluctuations are dampened, and (3) unemployment and its duration are more persistent. |
| Keywords: | Business cycles, job search intensity, matching efficiency, unemployment insurance, unemployment dynamics |
| JEL: | E24 E32 J24 J64 J65 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:cfm:wpaper:2441 |
| By: | Darougheh, Saman (Danmarks Nationalbank); Faccini, Renato (Danmarks Nationalbank); Melosi, Leonardo (University of Warwick, De Nederlandsche Bank, European University Institute and CEPR); Villa, Alessandro T. (FRB Chicago) |
| Abstract: | We develop a Heterogeneous Agents New Keynesian (HANK) model with a job ladder and endogenous on-the-job search (OJS) that challenges the traditional view of a negative relationship between unemployment and inflation. On the one hand, OJS is inflationary, sparking wage competition among firms to attract or retain workers. On the other hand, OJS strengthens workers’ bargaining power, reducing firms’ incentives to post vacancies and thereby increasing unemployment. The model explains the effects of the 2012 Danish tax reform, which influenced OJS differentially across the income distribution, on the employment transitions and wage growth observed in the microdata. |
| Keywords: | Job ladder models ; inflation ; Danish microdata |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:wrk:warwec:1536 |
| By: | Alex Ilek (Bank of Israel); Nimrod Cohen (Bank of Israel); Yaakov Chen-Zion (Bank of Israel) |
| Abstract: | We develop and calibrate a micro-founded DSGE model, tailored to the Israeli economy, based on key stylized facts about the Israeli economy. The model includes the housing market, both ownership and rental, and heterogeneous households. Macroprudential policy is represented by policy regarding the Loan-to-Value (LTV) ratio, a common measure in both literature and practice. Our primary objective is to examine the effects of monetary and macroprudential policies on the housing market, especially on housing prices. Our findings suggest that contractionary monetary policy pushes home prices downward while real rent prices rise. Macroprudential policy does not undermine monetary policy’s ability to achieve its primary goals, although it introduces a slight distributional effect. Tighter macroprudential policy (lower LTV) significantly reduces debt and the ownership-to-rent ratio in the economy, but slightly increases home prices and real rent prices. This challenges the existing DSGE model literature, and we attribute this discrepancy to the absence of a rental market (and real estate investors) in those models. These insights indicate that while macroprudential tools can help manage financial stability, their effect on home prices must be carefully assessed alongside other monetary measures. |
| Keywords: | housing market, monetary policy, macroprudential policy, ownership-to-rent ratio, heterogeneous households |
| JEL: | R21 E12 E32 E52 E61 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:boi:wpaper:2024.14 |
| By: | Vivek Sharma |
| Abstract: | What are the effects of a bank shock – or a decline in bank loan repayments – in an economy featuring bank-firm lending relationships and what is the propagation mechanism? I answer these questions in this paper and build a dynamic general equilibrium model in which collateral-constrained entrepreneurs have endogenously-persistent credit relationships with banks. Credit relationships play a dual role of shock amplifier and stabilizer in this environment. In presence of credit relationships, a bank shock in this model drives up credit spread at impact, causing bank credit to fall and paving the way for a downturn in macroeconomic activity. Economic activity recovers later on as spread falls, resulting in a rebound in bank loans and investment. When credit relationships are turned off, the model shows prolonged fall in bank loans and a persistent slowdown in investment, consumption and output as spread remains continually elevated, making bank credit expensive. A more persistent bank shock leads to a sustained decline in output even in the presence of lending relationships while a more volatile shock causes protracted slump in output in absence of credit relationships but not when they are present. |
| Keywords: | bank shocks, lending relationships, economic activity |
| JEL: | E32 E44 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2024-76 |
| By: | Gregor Boehl; Flora Budianto; Elod Takats |
| Abstract: | The paper investigates the macroeconomics of an energy transition – a shift from brown to green energy production through carbon taxation. Using a medium-scale DSGE model with energy production sectors and endogenous innovation in the green energy sector, we show that an energy transition – initiated through a brown energy tax – resembles a large supply side shock, causing a surge in inflation and energy prices and a decline in consumption. Innovation increases the efficiency of green energy production and drives energy prices down in the medium run. We document that monetary policy plays a critical role for the dynamics and pace of the transition, even if the transition is not explicitly part of the policy rule. A monetary policy with less emphasis on inflation stabilization allows for temporarily higher inflation and energy prices, which boosts R&D and innovation, enhancing welfare and accelerating the transition. |
| Keywords: | energy transition, innovation, inflation dynamics, monetary policy |
| JEL: | O44 E31 E52 E58 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1237 |
| By: | Eduardo G. C. Amaral |
| Abstract: | Rupert and Šustek (2019) showed that introducing endogenous capital into the canonical New-Keynesian model allows real interest rates to move in any direction after a positive monetary shock. According to them, this would prove that the real interest rate channel of monetary policy transmission is only observational — not structural — in that class of models, and therefore subject to the Lucas (1976) critique. In this paper, I show that such an identification problem for dynamic stochastic general equilibrium (DSGE) and vector autoregression (VAR) models can be circumvented by incorporating interest-rate smoothing — a feature as prevalent in medium-scale New-Keynesian models as capital itself — into the Taylor rule. I find that the negative association between changes in inflation and changes in the real interest rate is actually more robust than that between the former and changes in the nominal interest rate. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:bcb:wpaper:606 |
| By: | Gizem Koşar; Davide Melcangi; Laura Pilossoph; David Wiczer |
| Abstract: | Using detailed micro data, we document that households often use "stimulus" checks to pay down debt, especially those with low net wealth-to-income ratios. To rationalize these patterns, we introduce a borrowing price schedule into an otherwise standard incomplete markets model. Because interest rates rise with debt, borrowers have increasingly larger incentives to use an additional dollar to reduce debt service payments rather than consume. Using our calibrated model, we then study whether and how this marginal propensity to repay debt (MPRD) alters the aggregate implications of fiscal transfers. We uncover a trade-off between stimulus and insurance, as high-debt individuals gain considerably from transfers but consume relatively little immediately. We show how this mechanism can lower short-run fiscal multipliers but sustain aggregate consumption for longer. |
| Keywords: | marginal propensity to consume; consumption; debt; fiscal transfers |
| JEL: | E21 E62 |
| Date: | 2024–09–23 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedawp:99195 |
| By: | Andrew Binning; Susie McKenzie; Murat Özbilgin; Christie Smith (The Treasury) |
| Abstract: | Like many developed countries, New Zealand’s population is ageing. Its population is living longer and fertility rates have fallen, shifting the age composition towards older generations. This change in demographics is expected to continue into the future. In this paper, we explore a demographic model based on three core components: fertility rates, survival probabilities, and net migration. We illustrate how varying the assumptions affects the size and age-composition of the long-run population. The baseline projections indicate that New Zealand’s population could reach approximately 7.5 million beyond 2100, though there is considerable uncertainty about all of the demographic assumptions that underpin such a long-run projection. Given the fertility rates that currently prevail in New Zealand, net migration is likely to play a large role in maintaining New Zealand’s population. If current sub-replacement fertility rates continue, New Zealand’s population would eventually decline to zero if there was no net migration inflow. These demographic trends have implications for many important areas of fiscal policy including superannuation, health, education, and taxation. Population ageing is expected to substantially increase the fiscal cost of superannuation and health care. In related analysis, the Treasury is developing an overlapping generations (OLG) model to explore how the demographic trends identified here might influence private behaviour, including participation in the labour force, saving, and capital accumulation. This OLG framework also enables us to consider how private behaviour interacts with different fiscal policies, and how such policies would influence fiscal sustainability and the wellbeing of different generations. |
| JEL: | J11 H55 |
| Date: | 2024–08–16 |
| URL: | https://d.repec.org/n?u=RePEc:nzt:nztans:an24/08 |
| By: | Andrea Colciago (De Nederlandsche Bank and University of Milano Bicocca); Marco Membretti (University of Pavia) |
| Abstract: | We study the labor market effects of Temporary Barriers to Entry (TBEs). Estimates from a mixed-frequency Bayesian VAR show that TBEs: (i) reduce job creation by new entrants, but boost it for incumbent firms; (ii) persistently increase employment concentration in large firms; (iii) temporarily reduce unemployment, but are recessionary in the long run; and (iv) mainly result from federal regulation. We build a macroeconomic model, featuring firm heterogeneity, endogenous entry and exit, and labor market frictions, which successfully reproduces the VAR evidence. The model shows that TBEs temporarily boost short-run economic activity by favoring existing firms, but are ultimately costly. Policy measures aimed at protecting incumbent firms, even if temporary, entail welfare costs. |
| Keywords: | Job Creation; Reallocation; Unemployment; Heterogeneous firms; BVAR. |
| JEL: | C13 E32 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:pav:demwpp:demwp0222 |
| By: | Yoshihiko Hogen (Bank of Japan); Naoya Kishi (Bank of Japan) |
| Abstract: | The real effective exchange rate (RER) is inherently a general equilibrium variable and its fluctuations are influenced by various factors. In addition to supply factors such as productivity, demand factors, home bias, risk sharing, fiscal and monetary policies also affect the RER. In this context, the "Balassa-Samuelson effect" (B-S effect) focuses on the role of productivity differentials in the tradable sector in explaining the long-run trend of the RER. In this paper, we quantitatively examine the extent to which the B-S effect has been observed in Japan's RER since the 1970s by constructing and estimating a two-country (Japan and the United States), two sector (tradable and non-tradable), dynamic stochastic general equilibrium (DSGE) model. In addition, we also examine cases where the law of one price does not hold in tradables (dominant currency pricing and local currency pricing) and restrictions on labor mobility across sectors. Our results indicate that the long-run trend of the RER in Japan and the United States can be explained to a considerable extent by the B-S mechanism. In other words, according to the model analysis, the yen's appreciation trend in the RER from the 1970s to the mid-1990s can be explained by the rising relative productivity of Japan's tradable sector relative to the U.S., as pointed out in previous studies, and the effects of the Plaza Accord in 1985. In addition, the depreciation of the yen in real terms since the mid-1990s can be explained by a decline in the relative productivity of Japan's tradable sector relative to the United States; the "reverse B-S effect" from Japan's perspective. |
| Keywords: | Balassa-Samuelson effect; productivity; real exchange rate |
| JEL: | F41 F42 C51 |
| Date: | 2024–12–26 |
| URL: | https://d.repec.org/n?u=RePEc:boj:bojwps:wp24e22 |
| By: | Boris Hofmann; Cristina Manea; Benoit Mojon |
| Abstract: | Monetary theory and central bank doctrine generally prescribe a forceful reaction to demand-driven inflation and an attenuated response, if any, to supply-driven inflation. The Taylor–type rules used so far to describe central banks' reaction functions assume instead a uniform response of policy rates to inflation irrespective of its drivers. In this paper, we refine the specification of these policy rules to allow for a different (targeted) reaction to demand- versus supply-driven inflation. Estimates of the new targeted rule for the United States show a fourfold larger response to demand-driven inflation than to supply-driven inflation. We use a textbook New Keynesian model to discuss the properties of the new type of monetary policy rule in terms of business cycle fluctuations and welfare. |
| Keywords: | monetary policy trade–offs, targeted Taylor rules, inflation targeting |
| JEL: | E12 E3 E52 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1234 |
| By: | Lawrence J. Christiano; Martin S. Eichenbaum; Benjamin K. Johannsen |
| Abstract: | Researchers typically compare inflation in the new Keynesian (NK) model to published inflation measures constructed from indices like the CPI. Inflation in the standard NK model without price indexation is bounded above. The model analogue of fixed-weight inflation measures, like the CPI, is not. When inflation is in the range of values observed after 2021, there is a substantial difference between model-based and fixed-weight measures of inflation. This finding poses a challenge to using linear approximations to the NK model in environments with moderately high inflation and implies that analysts should construct data-consistent model analogues when assessing the NK model. |
| Keywords: | New keynesian model; Inflation |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-95 |
| By: | Giacomo Cattelan; Mr. Boaz Nandwa |
| Abstract: | Uncertainty around the real-time output gap has important implications for fiscal policy. This study uses successive vintages of the World Economic Outlook for emerging markets (EMs) during 1998-2022 to examine the reaction of discretionary fiscal policy to uncertain economic cycle in real-time. The findings show that EMs tend to have persistently negative and significantly more volatile real-time output gap estimates compared to advanced economies (AEs) and are less responsive to the output gap shocks. We calibrate a New Keynesian DSGE model to match the behavior of an average EM. The results from the model suggest that when EM policy makers are equally concerned about uncertainty around the output gap estimates and about fiscal implementation, fiscal policy is less counter-cyclical than the benchmark case with no uncertainty, entailing an efficiency loss for the purpose of output gap stabilization. On the other hand, when the concern is only about output gap uncertainty, EM policy makers tend to react more counter-cyclically but at a cost of public debt spiking in the short term and stabilizing over the long term. This implies that it might be optimal for EM policy makers to act more aggressively to stabilize the economy. We show that by adjusting the relative importance of output gap vs debt stabilization in their objective function, EM policy makers can achieve a similar outcome as in the benchmark case with no uncertainty. |
| Keywords: | Fiscal policy; real-time output gap estimates; public debt |
| Date: | 2024–12–13 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/251 |
| By: | Kristopher Gerardi; Franklin Qian; David Hao Zhang |
| Abstract: | We use a search and matching model to study the heterogeneous welfare effects of housing market illiquidity due to mortgage lock-in over the lifecycle. We find that younger home buyers are disproportionately affected by mortgage lock-in, which disrupts their typical pattern of moving to higher-quality neighborhoods. We estimate a model with heterogeneous seller-buyers bargaining within markets defined by CBSA-income terciles and with endogenous migration across markets. We find that on average mortgage lock-in reduces household listing probabilities by 21 percent to 23 percent, increases time on the market by 52 percent to 142 percent, increases house prices by 3 percent to 8 percent, and decreases match surplus by 3 percent to 29 percent through its effects on the search and matching process. The pricing and match surplus effects are larger for younger households and for households in lower-income areas, due to a higher idiosyncratic dispersion in buyer valuation leading to larger match surplus variation in those areas. Our study highlights the welfare benefits of market thickness in real estate markets. |
| Keywords: | mortgage lock-in; moving to opportunity; housing market liquidity; idiosyncratic dispersion in house prices; FRMs |
| JEL: | G18 G21 E52 |
| Date: | 2024–10–15 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedawp:99197 |
| By: | Isaac Baley; Andres Blanco |
| Abstract: | We study aggregate capital dynamics in an investment model with idiosyncratic productivity shocks, fixed capital adjustment costs, and irreversibility driven by a wedge between capital purchase and resale prices. We derive sufficient statistics capturing the role of investment frictions on aggregate capital fluctuations, measure these statistics with investment microdata, and exploit them to discipline the capital price wedge. Irreversibility doubles the persistence of capital fluctuations and is crucial for reconciling micro-level investment behavior with macroeconomic propagation. |
| Keywords: | investment frictions; capital price wedge; irreversibility; lumpiness; fixed adjustment costs; capital misallocation; Tobin's q; transitional dynamics; inaction; propagation |
| JEL: | D30 D80 E20 E30 |
| Date: | 2024–12–23 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedawp:99326 |
| By: | Mateo Velásquez-Giraldo |
| Abstract: | Survey measurements of households’ expectations about U.S. equity returns show substantial heterogeneity and large departures from the historical distribution of actual returns. The average household perceives a lower probability of positive returns and a greater probability of extreme returns than history has exhibited. I build a life-cycle model of saving and portfolio choices that incorporates beliefs estimated to match these survey measurements of expectations. This modification enables the model to greatly reduce a tension in the literature in which models that have aimed to match risky portfolio investment choices by age have required much higher estimates of the coefficient of relative risk aversion than models that have aimed to match age profiles of wealth. The tension is reduced because beliefs that are more pessimistic than the historical experience reduce people’s willingness to invest in stocks. |
| Keywords: | Consumption and Saving; Heterogeneous Beliefs; Life cycle dynamics; Portfolio choice |
| JEL: | G11 G40 G51 G53 E21 D15 |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-97 |
| By: | Ambrocio, Gene; Haavio, Markus; McClung, Nigel |
| Abstract: | We show that sacrifice ratios associated with announcements of the most likely course of monetary policy are lower when the implementation date is further out into the future in the basic New Keynesian framework. This is not due to forward guidance puzzle effects and holds even when agents' expectations feature cognitive discounting. Nevertheless, the rate at which sacrifice ratios fall with the implementation horizon is attenuated by the intensity of cognitive discounting. We also show that our results also hold in a model with additional real and nominal rigidities. These results indicate that telegraphing the most likely course of action for monetary policy attenuates the effects on output relative to inflation. |
| Keywords: | monetary policy announcements, sacrifice ratio, cognitive discounting |
| JEL: | E31 E52 E58 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofrdp:306368 |
| By: | Jonathon Hazell (London School of Economics); Stephan Hobler (London School of Economics) |
| Abstract: | This paper measures the causal effect of deficits on inflation using a “high frequency narrative approach”. We identify an event that released news about the 2021 deficits in the United States—the Georgia Senate election runoff. We calculate the size of the shock using new narrative data from investment banks. We then study the high frequency response of inflation forecasts from asset prices, in order to separate deficits from other factors affecting inflation. We estimate an “inflation multiplier” of 0.18% price level growth over two years, for a 1% deficit-to-GDP shock. Our estimate implies that the 2021 deficits caused around 30% of the 2021-22 inflation—meaning deficits were important but not the only cause. A standard heterogeneous agent New Keynesian model quantitatively matches the size and dynamics inflation multiplier. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:cfm:wpaper:2439 |
| By: | Cristiano Cantore; Vedanta Dhamija |
| Abstract: | We study the implications of a ‘dual mandate’ of price and output stability in a heterogeneous agent New Keynesian economy where fiscal policy is set in nominal terms. Specifically, the government controls the quantity of nominal debt, enabling price level determination independently of the interest rate trajectory (Hagedorn, 2021). Our findings indicate that under an inflation-targeting regime, price level determinacy is often the exception than the norm when the central bank pursues a dual mandate. The dynamics of government spending emerge as a crucial driver of this result. To address this challenge, we show that possible solutions include price level targeting and stabilizing consumption inequality. |
| Date: | 2024–12–09 |
| URL: | https://d.repec.org/n?u=RePEc:oxf:wpaper:1059 |
| By: | Aneli Bongers (Department of Economics, University of Malaga); Cesar Ortiz (Department of Economics, Thompson Rivers University); Jose L. Torres (Department of Economics, University of Malaga) |
| Abstract: | This paper presents the Dynamic Integrated Space-Economy (DISE) model, which is designed to study the economic implications of alternative policies aimed at mitigating orbital debris. The DISE model combines a standard neoclassical growth model with a physical space model for orbital debris dynamics. The economic model categorizes capital assets into two types: Earth's capital and Space's capital (i.e., satellites). DISE is intended to calculate the cost of space debris and its impact on the global economy. The model is simulated for a 200-year period under different scenarios, including a clean space environment, laissez-faire, de-orbiting policy, debris-free launch systems, a combination of de-orbiting and debris-free launch vehicles, and collision avoidance. |
| Keywords: | Outer space; Orbital debris; Satellites, Integrated Assessment Models; Mitigation policies. |
| JEL: | D62 E22 H23 Q53 Q58 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:bhw:wpaper:03-2024 |
| By: | Pedro Teles; Oreste Tristani |
| Abstract: | Motivated by the surge in debt levels through the pandemic crisis, we revisit the issue of the optimal financing of public debt. In contrast with the existing literature, we find that the optimal response of inflation to a large increase in debt levels is a gradual but significant and long-lasting rise in inflation. The difference in our results is due to a different assumption on the source of nominal rigidities. While the literature has focused on sticky prices, of either the Calvo or Rotemberg type, we consider sticky plans as in the sticky information set up of Mankiw and Reis (2002). A crucial feature of our results is that a significant inflation response is desirable only if the maturity of debt is (realistically) long. In a calibrated example, we show that QE policies, by reducing the maturity of the debt held by the private sector, may lead to an optimally higher response of inflation. |
| JEL: | E31 E32 E52 E58 H21 H63 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ptu:wpaper:w202403 |
| By: | Ponthiere, Gregory |
| Abstract: | This paper examines the potential role of higher education subsidies as an insurance device against the risk of having a short life, that is, as a device reducing the variance in lifetime well-being due to unequal longevities. We use a two-period dynamic OLG economy with human capital and risky lifetime to study the impact of a subsidy on higher education (financed by taxing labor earnings at older ages) on the distribution of lifetime well-being between long-lived and short-lived individuals. It is shown that, whereas the subsidy on higher education improves necessarily the lot of short-lived individuals in comparison to the laissez-faire, it is only when the subsidy is higher than a critical threshold that this reduces inequalities in lifetime well-being between long-lived and short-lived individuals. Whether one adopts the utilitarian or the ex post egalitarian social welfare function, the optimal subsidy on higher education lies above the critical threshold, but is larger under the latter social objective. |
| Keywords: | higher education, mortality risk, insurance, longevity, human capital |
| JEL: | I25 I28 I31 J17 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:glodps:1528 |
| By: | Andres Blanco; Corina Boar; Callum J. Jones; Virgiliu Midrigan |
| Abstract: | Existing menu cost models, when parameterized to match the micro-price data, cannot reproduce the extent to which the fraction of price changes increases with inflation. In addition, in the presence of strategic complementarities, they predict implausibly large menu costs and misallocation. We resolve these shortcomings using a multi-product menu cost model that features two key ingredients. First, the products sold by a firm are imperfect substitutes. Second, strategic complementarities are at the firm, not product level. In contrast to existing models, the fraction of price changes increases rapidly with the size of monetary shocks, so our model implies a non-linear Phillips curve. |
| Keywords: | menu costs; inflation; Phillips curve |
| JEL: | E12 E31 E32 E52 |
| Date: | 2024–09–23 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedawp:99169 |
| By: | Andres Blanco; Corina Boar; Callum J. Jones |
| Abstract: | We show that standard menu cost models cannot simultaneously reproduce the dispersion in the size of micro-price changes and the extent to which the fraction of price changes increases with inflation in the U.S. time-series. Though the Golosov and Lucas (2007) model generates fluctuations in the fraction of price changes, it predicts too little dispersion in the size of price changes and therefore little monetary nonneutrality. In contrast, versions of the model that reproduce the dispersion in the size of price changes and generate stronger monetary nonneutrality predict a nearly constant fraction of price changes. |
| Keywords: | menu costs; inflation; fraction of price changes |
| JEL: | E31 E32 E52 |
| Date: | 2024–09–23 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedawp:99188 |