Search Results
Working Paper
Relative Price Shocks and Inflation
Inflation is determined by interaction between real factors and monetary policy. Among the most important real factors are shocks to the supply and demand for different components of the consumption basket. We use an estimated multi-sector New Keynesian model to decompose the behavior of U.S. inflation into contributions from sectoral (or "relative price") shocks, monetary policy shocks, and aggregate real shocks. The model is estimated by maximum likelihood with U.S. data for the post-1994 period in which inflation and the monetary policy regime appeared to be stable. In addition to ...
Journal Article
Consumer Payment Choice in the Fifth District: Learning from a Retail Chain
This paper studies payment variation across locations and time using five years of transactions data from a large discount retail chain with hundreds of stores across the Fifth District. The results show that the median transaction size, demographics, education levels, and state fixed effects are the top factors in explaining cross-location payment variation in the sample. We also identify interesting time patterns of payment variation, particularly the longer-term decline in the cash share of transactions largely replaced by debit.
Working Paper
Regional inflation in a currency union: fiscal policy vs. fundamentals
We develop a general equilibrium model of a two-region currency union. There are two types of goods: non-trade goods, and traded goods for which markets are segmented. Monetary policy is set by a central monetary authority and is non-neutral due to nominal price rigidities. Fiscal policy is determined at the regional level by each region's government. We find that productivity shocks alone generate significant variation in inflation across the two countries. Government spending shocks, in contrast, do not account for a significant portion of inflation variation. Varying relative country size, ...
Journal Article
Nominal frictions, relative price adjustment, and the limits to monetary policy
In simple sticky-price models, the guiding principle for optimal monetary policy is to stabilize nominal prices so as to eliminate the distortions associated with price adjustment. If there is only one sector, or one category of consumption goods, then stabilizing nominal prices means making the inflation rate zero. A growing subliterature on sticky prices considers optimal monetary policy when there are multiple sectors of sticky-price goods, broadly defined. If the relative prices of these goods need to move over time, then the principle just stated cannot be satisfied for all goods. Here I ...
Briefing
How Did Short-Term Market Rates React to Liftoff?
The implementation of monetary policy has changed significantly since 2008. In particular, very large excess reserves in the financial system have led to the creation of new tools to manage the federal funds rate. Given these changes, some observers have wondered how money market interest rates would respond to "liftoff," the Fed's first interest rate increase from effectively zero. Since liftoff in December 2015, it appears that the Fed's influence over short-term interest rates remains intact.
Briefing
A Model-Based Perspective on Inflation and the Distribution of Relative Price Changes
A series of articles starting in 2022 has discussed the empirical relationship between inflation and the distribution of relative price changes: In the stable regime from 1995 until the pandemic era, the monthly inflation rate was closely related to a measure of asymmetry or skewness in the distribution of relative price changes. In this article, we describe related research that uses a dynamic macroeconomic model to study how inflation is jointly determined by monetary policy and "relative price shocks," as well as other shocks.1 We use that model to help us understand the factors that lead ...
Working Paper
Investigating Nonneutrality in a State-Dependent Pricing Model with Firm-Level Productivity Shocks
In recent years there has been an abundance of empirical work examining price setting behavior at the micro level. First generation models with price setting rigidities were generally at odds with much of the micro price data. A second generation of models, with fixed costs of price adjustment and idiosyncratic shocks, have attempted to rectify this shortcoming. Using a model that matches a large set of microeconomic facts we find significant nonneutrality. We decompose the nonneutrality and find that state-dependence plays an important part in the responses of output and inflation to a ...
Working Paper
Payment Choice and the Future of Currency: Insights from Two Billion Retail Transactions
This paper uses transaction-level data from a large discount chain together with zip-code-level explanatory variables to learn about consumer payment choices across size of transaction, location, and time. With three years of data from thousands of stores across the country, we identify important economic and demographic effects; weekly, monthly, and seasonal cycles in payments, as well as time trends and significant state-level variation that is not accounted for by the explanatory variables. We use the estimated model to forecast how the mix of consumer payments will evolve and to forecast ...