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Monetary Policy, Trend Inflation and the Great Moderation: An Alternative Interpretation.” National Bureau of Economic Research Working Paper 14621
, 2008
"... Abstract: With positive trend inflation, the Taylor principle does not guarantee a determinate equilibrium. We provide new theoretical results on determinacy in New Keynesian models with positive trend inflation and new empirical findings on the Federal Reserve’s reaction function before and after t ..."
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Cited by 42 (11 self)
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Abstract: With positive trend inflation, the Taylor principle does not guarantee a determinate equilibrium. We provide new theoretical results on determinacy in New Keynesian models with positive trend inflation and new empirical findings on the Federal Reserve’s reaction function before and after the Volcker disinflation to find that 1) while the Fed likely satisfied the Taylor principle before Volcker, the US economy was still subject to selffulfilling fluctuations in the 1970s, 2) the US economy switched to determinacy during the Volcker disinflation, and 3) the switch reflected changes in the Fed’s response to macroeconomic variables and the decline in trend inflation.
Ination Persistence: Alternative Interpretations and Policy Interpretations.Sta¤Report 286, Federal Reserve Bank of
, 2007
"... In this paper I consider the implications of two alternative interpretations of the observed persistence in inflation, that correspond to two alternative specifications of the New Keynesian Phillips curve. The first allows for some degree of intrinsic persistence, in the form of a term in lagged inf ..."
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Cited by 27 (5 self)
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In this paper I consider the implications of two alternative interpretations of the observed persistence in inflation, that correspond to two alternative specifications of the New Keynesian Phillips curve. The first allows for some degree of intrinsic persistence, in the form of a term in lagged inflation in the NKPC. The second is a purely forwardlooking model, where expectations farther into the future matter, and where coefficients are time varying. This specification attributes most of the observed persistence to the persistence of the underlying inflation trend, which is 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 persistence different from what is in the economy. The results suggest that the costs of implementing stabilization policy overestimating the degree of intrinsic persistence are potentially higher than the costs of ignoring an existing persistence; the result is more clear cut in the case in which the policymaker minimizes a welfarebased loss function. PRELIMINARY DRAFT ∗Prepared for the November 2006 CarnegieRochester Conference on Monetary Policy. I wish to thank Mike Woodford for numerous discussions on this project, and Krishna Rao for excellent research assistance.
Sticky Prices versus Monetary Frictions: An Estimation of Policy Tradeoffs,” forthcoming
 in AEJ Macroeconomics
, 2009
"... We develop a twosector monetary model with a centralized and decentralized market. Activities in the centralized market resemble those in a standard New Keynesian economy with price rigidities. In the decentralized market agents engage in bilateral exchanges for which money is essential. This paper ..."
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Cited by 22 (9 self)
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We develop a twosector monetary model with a centralized and decentralized market. Activities in the centralized market resemble those in a standard New Keynesian economy with price rigidities. In the decentralized market agents engage in bilateral exchanges for which money is essential. This paper is the first to formally estimate such a model, evaluate its fit based on postwar U.S. data, and assess its money demand properties. Steady state welfare calculations reveal that the distortions created by the monetary friction may be of similar magnitude as the distortions created by the New Keynesian friction.
When the Highest Bidder Loses the Auction: Theory and Evidence from Public Procurement
, 2009
"... When bids do not represent binding commitments, the use of a first price sealed bid auction favors those bidders who are less penalized from reneging on their bids. These bidders are the most likely to win but also the most likely to default on their bid. In this paper I study theoretically two meth ..."
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Cited by 18 (0 self)
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When bids do not represent binding commitments, the use of a first price sealed bid auction favors those bidders who are less penalized from reneging on their bids. These bidders are the most likely to win but also the most likely to default on their bid. In this paper I study theoretically two methods often used in public procurement to deal with this problem: (1) augmenting the first price auction with an expost verification of the responsiveness of the bids and (2) using an average bid auction in which the winner is the bidder whose bid is closest to the simple average of all the bids. The average bid auction is new to economics but has been proposed in civil engineering literature. I show that when penalties for defaulting are asymmetric across bidders and when their valuations are characterized by a predominant common component, the average bid auction is preferred over the standard first price by an auctioneer when the costs due to the winner’s bankruptcy are high enough. Depending on the cost of the expost verification, the average bid auction can be dominated by the first price with monitoring. I use a new dataset of Italian public procurement auctions, run alternately using a form of the average bid auction or the augmented first price, to structurally estimate the bids’ verification cost, the firms’mark up and the inefficiency generated by the average bid auctions.
A Search for a Structural Phillips Curve
, 2004
"... The foundation of the New Keynesian Phillips curve is a model of price setting with nominal rigidities which implies that the dynamics of in‡ation are well explained by the evolution of real marginal costs. The objective of this paper is to analyze whether this is a structurallyinvariant relationsh ..."
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Cited by 12 (3 self)
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The foundation of the New Keynesian Phillips curve is a model of price setting with nominal rigidities which implies that the dynamics of in‡ation are well explained by the evolution of real marginal costs. The objective of this paper is to analyze whether this is a structurallyinvariant relationship. To assess this, we …rst estimate an unrestricted timeseries model for in‡ation, unit labor costs, and other variables, and present evidence that their joint dynamics are well represented by a vector autoregression with drifting coe ¢ cients and volatilities, as in Cogley and Sargent (2004). Then, following Sbordone (2002, 2003), we apply a twostep minimum distance estimator to estimate deep parameters. Taking as given estimates of the unrestricted VAR, we estimate parameters of the NKPC by minimizing a quadratic function of the restrictions that the theoretical model imposes on the reduced form. Our results suggest that it is possible to reconcile a constantparameter NKPC with the driftingparameter VAR, and therefore we argue that the pricesetting model is structurally invariant. JEL Classi…cation: E31 In‡ation 1
Trend Inflation, Taylor Principle and Indeterminacy
, 2009
"... Positive trend inflation shrinks the determinacy region of a basic new Keynesian DSGE model when monetary policy is conducted by a contemporaneous interest rate rule. Neither the Taylor principle, which requires the inflation coefficient to be greater than one, nor the generalized Taylor principle, ..."
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Cited by 9 (2 self)
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Positive trend inflation shrinks the determinacy region of a basic new Keynesian DSGE model when monetary policy is conducted by a contemporaneous interest rate rule. Neither the Taylor principle, which requires the inflation coefficient to be greater than one, nor the generalized Taylor principle, which requires that the nominal interest rate should be raised by more than the increase in inflation in the long run, is a sufficient condition for local determinacy of equilibrium.
2011): “A note on expectational stability under nonzero trend inflation,” Discussion Papers 1102, Graduate
"... This study examines the expectational stability of the rational expectation equilibria (REE) under Taylor rules when trend inflation is nonzero. We find that whether or not a higher (lower) trend inflation makes the REE more (less) unstable depends largely on the data (such as contemporaneous data ..."
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Cited by 7 (0 self)
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This study examines the expectational stability of the rational expectation equilibria (REE) under Taylor rules when trend inflation is nonzero. We find that whether or not a higher (lower) trend inflation makes the REE more (less) unstable depends largely on the data (such as contemporaneous data, forecasts and lagged data) used in the conduct of monetary policy. JEL Classification: D84, E31, E52
RELATIVE PRICE DISTORTIONS AND INFLATION PERSISTENCE
, 2009
"... Stickyprice models often suggest that relative price distortion is a major cost of inflation. We provide an intuition for this: Even at low rates, inflation strongly affects price dispersion which in turn has an impact on the economy qualitatively similar to, and of the order of magnitude of, a neg ..."
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Cited by 2 (0 self)
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Stickyprice models often suggest that relative price distortion is a major cost of inflation. We provide an intuition for this: Even at low rates, inflation strongly affects price dispersion which in turn has an impact on the economy qualitatively similar to, and of the order of magnitude of, a negative shift in productivity. The utility cost of price dispersion is quantified and its impact on optimal monetary policy discussed. Price dispersion is incorporated into a linearized model. Strikingly, a contractionary nominal shock has a persistent, negative humpshaped impact on inflation, but may have a positive humpshaped impact on output.
Price Indexation and Optimal Simple Rules in a Medium Scale New Keynesian Model
"... Indexation was the subject of a substantial literature in the era of high inflation, but it was then neglected. Recently, it has becoming standard to assume backward looking indexation in prices in the New Keynesian DSGE models. Given the backward looking indexation scheme, we study how the degree o ..."
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Cited by 1 (0 self)
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(Show Context)
Indexation was the subject of a substantial literature in the era of high inflation, but it was then neglected. Recently, it has becoming standard to assume backward looking indexation in prices in the New Keynesian DSGE models. Given the backward looking indexation scheme, we study how the degree of indexation affects the optimal simple policy rule in a mediumscale model. We show that both the shape and the parameters of the simple policy rule are affected by the degree of indexation. In particular, indexation helps in stabilizing price dispersion, thus optimal monetary policy does not need to focus on stabilizing inflation. We also show that full indexation is a very peculiar assumption, eliminating the price dispersion mechanism in the model. The central message of this paper is that one should be very careful in introducing ad hoc features, and hence use these models for normative analysis.