Search Results
Journal Article
Wage Growth, Labor Market Tightness, and Inflation: A Service Sector Analysis
This Economic Commentary explores the connections among labor market tightness, wage inflation, and price inflation at the service sector level. Across most service sectors, sector-specific labor market tightness and nominal wage growth have been above prepandemic averages since 2022. The data suggest that a stronger positive relationship between labor market tightness and wage growth has emerged in the aftermath of the pandemic. The relationship between sector-specific wage growth and inflation is more varied. In the education and health services sector, higher wage growth is associated with ...
Working Paper
Predictable Forecast Errors in Full-Information Rational Expectations Models with Regime Shifts
This paper shows that regime shifts in Full-Information Rational Expectations (FIRE) models generate predictable regime-dependent forecast errors in macro aggregates. Hence, forecast error predictability alone is neither sufficient to reject FIRE nor informative about alternative expectations theories. We instead propose a regime-robust test of FIRE and apply it to a medium-scale New Keynesian model with monetary policy regime shifts that is estimated on US data. While the test fails to decisively reject FIRE, the model conditional on macro data implies expectations that are generally ...
Working Paper
Low Passthrough from Inflation Expectations to Income Growth Expectations: Why People Dislike Inflation
Using a novel experimental setup, we study the direction of causality between consumers’ inflation expectations and their income growth expectations. In a large, nationally representative survey of US consumers, we find that the rate of passthrough from expected inflation to expected income growth is incomplete, on the order of 20 percent. There is no statistically significant effect going in the other direction. Passthrough varies systematically with demographic and socioeconomic factors, with greater passthrough for higher-income individuals than lower-income individuals, although it is ...
Working Paper
Wealth Effects, Price Markups, and the Neo-Fisherian Hypothesis
By introducing Jaimovich-Rebelo (JR) consumption-labor nonseparable preferences into an otherwise standard New Keynesian model, we show that the occurrence of positive comovement between inflation and the nominal interest rate conditional on a nominal shock - the so-called neo-Fisherian hypothesis - depends on the extent of wealth effects in households’ labor supply decisions. Neo-Fisherianism appears more prominent in economic environments with i) weaker wealth effects on labor supply (in particular for Greenwood-Hercowitz-Huffmann preferences where wealth effects are absent), and ii) ...
Working Paper
Mis-specified Forecasts and Myopia in an Estimated New Keynesian Model
The paper considers a New Keynesian framework in which agents form expectations based on a combination of mis-specified forecasts and myopia. The proposed expectations formation process is found to be consistent with all three empirical facts on consensus inflation forecasts, namely, that forecasters under-react to ex-ante forecast revisions, that forecasters over-react to recent events, and that the response of forecast errors to a shock initially under-shoots but then over-shoots. The paper then derives the general equilibrium solution consistent with the proposed expectations formation ...
Journal Article
Implications of Bank Equity Price Declines for Inflation
This Economic Commentary examines the relationship between bank equity price index returns and inflation in advanced economies. While large declines in bank equity price indices are generally followed by declines in the ratio of bank credit to GDP, a measure of credit supply, and economic activity as measured by GDP, they have essentially no effect on inflation. These findings suggest that the collapse of several regional banks in early 2023 would not, on its own, put downward pressure on inflation.
Working Paper
Indirect Consumer Inflation Expectations: Theory and Evidence
Based on indirect utility theory, we introduce a novel methodology of measuring inflation expectations indirectly. This methodology starts at the individual level, asking consumers about the change in income required to buy the same amounts of goods and services one year ahead. Analytically, our methodology possesses smaller ex-post aggregate inflation forecast errors relative to forecasts based on conventional survey questions. We ask this question in a large-scale, high-frequency survey of consumers in the US and 14 countries, and we show that indirect consumer inflation expectations ...
Working Paper
Supply Chain Networks and the Macroeconomic Expectations of Firms
In a randomized control trial of customer-supplier firm pairs in New Zealand, we treat with information one firm in a pair and analyze the treatment's effects on the expectations and actions of both the directly treated firms (direct effect) and connected firms that did not directly receive information (spillover effect). The direct and spillover effects on expectations and actions are significant and of comparable magnitude. Higher expected future real GDP growth increases prices and employment, while greater uncertainty about it reduces prices, investment, and employment. We show that ...
Journal Article
Consumer Inflation Expectations Across Surveys and over Time
Different survey-based measures of consumer inflation expectations have diverged in recent months. This Economic Commentary compares these measures and the survey questions underlying them. Our analysis suggests that the divergences across survey-based measures of inflation expectations can be attributed to various features and sample characteristics specific to each survey.
Journal Article
Trend Inflation and Implications for the Phillips Curve
This Economic Commentary estimates trend PCE inflation and a Phillips curve with time-varying parameters while allowing for trend inflation to affect the frequency at which firms change prices. Since the beginning of 2021, trend PCE inflation has risen well above the FOMC’s 2 percent long-term inflation target, and the most recent estimate of trend inflation in 2022:Q4 is 3.4 percent. With the increase in trend inflation, the Phillips curve slope has risen above its prepandemic level. At the same time, the relationship between current inflation and inflation expectations has strengthened. ...