Search Results
Working Paper
Learning about monetary policy rules when labor market search and matching frictions matter
This paper examines implications of incorporating labor market search and matching frictions into a sticky price model for determinacy and E-stability of rational expectations equilibrium (REE) under interest rate policy. When labor adjustment takes place solely at the extensive margin, forecast-based policy that meets the Taylor principle is likely to induce indeterminacy and E-instability, regardless of whether it is strictly or flexibly inflation targeting. When labor adjustment takes place at both the extensive and intensive margins, the strictly inflation-forecast targeting policy ...
Working Paper
Firm-specific labor, trend inflation, and equilibrium stability
The present paper explores the implications for monetary policy of different labor market structures. In one labor market workers are identical and thus easily interchangeable between firms, while in another labor market workers are specialized to fill the needs of specific firms. The labor market structure turns out to be a crucial determinant of the effectiveness of monetary policies guided by the Taylor principle in an environment of high trend inflation. ; According to the Taylor principle, an undesirable rise in inflation requires a disproportionately strong response of interest rates. ...
Working Paper
Monetary policy, trend inflation, and the Great Moderation: an alternative interpretation: comment based on system estimation
What caused the U.S. economy's shift from the Great Inflation era to the Great Moderation era? {{p}} A large literature shows that the shift was achieved by the change in monetary policy from a passive to an active response to inflation. However, Coibion and Gorodnichenko (2011) attribute the shift to a fall in trend inflation along with the policy change, based on a solely estimated Taylor rule and a calibrated staggered-price model. We estimate the Taylor rule and the staggered-price model jointly and demonstrate that the change in monetary policy responses to inflation and other variables ...
Journal Article
How Should Monetary Policy Respond to a Contraction in Labor Supply?
Conventional wisdom holds that a central bank should tighten monetary policy after a surprise decline in labor supply to offset the inflationary effects of the decline. However, this policy prescription comes from models of monetary policy that abstract from labor force participation. We examine the policy implications of worker entry into and exit from the labor force. We find that cyclical changes in labor force participation call for a less restrictive policy response to a decline in labor supply. The less restrictive policy response is appropriate because policy tightening reduces the ...
Working Paper
Labor market search, the Taylor principle, and indeterminacy
In a sticky-price model with labor market search and matching frictions, forecast-based interest rate policy almost always induces indeterminacy when it is strictly inflation targeting and satisfies the Taylor principle. Indeterminacy is due to a vacancy channel of monetary policy that makes inflation expectations self-fulfilling. The effect of this channel strengthens as the sluggishness of the adjustment of employment relative to that of consumption increases. When this relative sluggishness is high, the Taylor principle fails to ensure determinacy, regardless of whether the policy is ...
Working Paper
A Theory of Intrinsic Inflation Persistence
We propose a novel theory of intrinsic inflation persistence by introducing trend inflation and variable elasticity of demand in a model with staggered price and wage setting. Under nonzero trend inflation, the variable elasticity generates intrinsic persistence in inflation through a measure of price dispersion stemming from staggered price setting. It also introduces intrinsic persistence in wage inflation under staggered wage setting, which affects price inflation. With the theory we show that inflation exhibits a persistent, hump-shaped response to a monetary policy shock. We also show ...
Working Paper
Monetary Policy and Macroeconomic Stability Revisited
A large literature with canonical New Keynesian models has established that the Fed's policy change from a passive to an active response to inflation led to U.S. macroeconomic stability after the Great Inflation of the 1970s. We revisit this view by estimating a staggered price model with trend inflation using a Bayesian method that allows for equilibrium indeterminacy and adopts a sequential Monte Carlo algorithm. {{p}} The model empirically outperforms a canonical New Keynesian model and demonstrates an active response to inflation even in the Great Inflation era, during which the U.S. ...
Working Paper
Kinked demand curves, the natural rate hypothesis, and macroeconomic stability
In the presence of staggered price setting, high trend inflation induces a large deviation of steady-state output from its natural rate and indeterminacy of equilibrium under the Taylor rule. This paper examines the implications of a ''smoothed-off'' kink in demand curves for the natural rate hypothesis and macroeconomic stability using a canonical model with staggered price setting, and sheds light on the relationship between the hypothesis and the Taylor principle. An empirically plausible calibration of the model shows that the kink in demand curves mitigates the influence of price ...
Journal Article
Why Has Inflation Persistence Declined?
Working Paper
Monopsonistic Wage-setting and Monetary Policy
Research in labor economics has documented evidence of labor market monopsony. Nevertheless, macroeconomic studies routinely consider households' wage-setting under monopolistic competition. We introduce firms' wage-setting under monopsonistic competition in an otherwise standard sticky-price model. This substantially alters the implications for wage dynamics, welfare, and policy. Compared to its counterpart model with monopolistic wage-setting, our model indicates that the wage Phillips curve includes the wage markdown as its main driver and has a steeper slope generated by strategic ...