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Working Paper
Modelling inflation dynamics: a critical review of recent research
In recent years, a broad academic consensus has arisen around the use of rational expectations sticky-price models to capture inflation dynamics. These models are seen as providing an empirically reasonable characterization of observed inflation behavior once suitable measures of the output gap are chosen; and, moreover, are perceived to be robust to the Lucas critique in a way that earlier econometric models of inflation are not. We review the principal conclusions of this literature concerning: 1) the ability of these models to fit the data; 2) the importance of rational forward-looking ...
Working Paper
Inflation targets, credibility, and persistence in a simple sticky-price framework
This paper presents a re-formulated version of a canonical sticky-price model that has been extended to account for variations over time in the central bank's inflation target. We derive a closed-form solution for the model, and analyze its properties under various parameter values. The model is used to explore topics relating to the effects of disinflationary monetary policies and inflation persistence. In particular, we employ the model to illustrate and assess the critique that standard sticky-price models generate counterfactual predictions for the effects of monetary policy.
Working Paper
A guide to the use of chain aggregated NIPA data
In 1996, the U.S. Department of Commerce began using a new method to construct all aggregate ``real'' series in the National Income and Product Accounts (NIPA). This method employs the so-called ``ideal chain index'' pioneered by Irving Fisher. The new methodology has some extremely important implications that are unfamiliar to many practicing empirical economists; as a result, mistaken calculations with NIPA data have become very common. This paper explains the motivation for the switch to chain aggregation and then illustrates the usage of chain-aggregated data with three topical examples, ...
Working Paper
Real wage dynamics and the Phillips curve
Since Friedman (1968), the traditional derivation of the accelerationist Phillips curve has related expected real wage inflation to the unemployment rate and then invoked markup pricing and adaptive expectations to generate the accelerationist price inflation equation. Blanchflower and Oswald (1994) have argued that microeconomic evidence of a low autoregression coefficient in real wage regressions invalidates this approach, a conclusion that has been disputed widely on the grounds that the true autoregression coefficient is close to one. This paper shows that the accelerationist relationship ...
Conference Paper
Modeling inflation dynamics: a critical survey of recent research
Working Paper
Wage curve vs. Phillips curve: are there macroeconomic implications?
The standard derivation of the accelerationist Phillips curve relates expected real wage inflation to the unemployment rate and invokes a constant price markup and adaptive expectations to generate the accelerationist price inflation formula. Blanchflower and Oswald (1994) argue that microeconomic evidence of a low autoregression coefficient in real wage regressions invalidates the macroeconomic Phillips curve. This conclusion has been disputed by a number of authors on the grounds that the true autoregression coefficient is close to 1. This paper shows that given the assumption of a constant ...
Working Paper
Unemployment and the durational structure of exit rates
This paper presents a simple model of wage bargaining and employment flows designed to address the effects of policies to increase the rate of exit to employment of the long-term unemployed. Exit rates from long- and short-term unemployment have two effects on the unemployment rate: a positive one as high exit rates strengthen current employees' bargaining positions and thus wages and a negative one as faster outflows from unemployment reduce the stock of unemployed. Thus, there is a trade-off between the exit rate from long-term unemployment and the exit rate from short-term unemployment. ...
Working Paper
Can rational expectations sticky-price models explain inflation dynamics?
The canonical inflation specification in sticky-price rational expectations models (the new-Keynesian Phillips curve) is often criticized on the grounds that it fails to account for the dependence of inflation on its own lags. In response, many recent studies have employed a "hybrid" sticky-price specification in which inflation depends on a weighted average of lagged and expected future values of itself, in addition to a driving variable such as the output gap. In this paper, we consider some simple tests of the hybrid model that are derived from the model's closed-form solution. Our ...
Working Paper
Computers, obsolescence, and productivity
This paper examines the role that computers have played in boosting U.S. economic growth in recent years. The paper focuses on two effects--the effect of increased productivity in the computer-producing sector and the effect of investments in computing equipment on the productivity of those who use them--and concludes that together they account for almost all of the recent acceleration in U.S. labor productivity. In calculating the computer-usage effect, standard NIPA measures of the capital stock are inappropriate for growth accounting because they do not account for technological ...
Working Paper
Explaining the investment boom of the 1990s
Real equipment investment in the United States has boomed in recent years, led by soaring investment in computers. We find that traditional aggregate econometric models completely fail to capture the magnitude of this recent growth--mainly because these models neglect to address two features that are crucial (and unique) to the current investment boom. First, the pace at which firms replace depreciated capital has increased. Second, investment has been more sensitive to the cost of capital. We document that these two features stem from the special behavior of investment in computers and ...