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Working Paper
A response to Cogley and Sbordone's comment on “Closed-Form Estimates of the New Keynesian Phillips Curve with Time-Varying Trend Inflation”
In their 2010 comment (which we refer to as CS10), Cogley and Sbordone argue that: (1) our estimates are not entirely closed form, and hence are arbitrary; (2) we cannot guarantee that our estimates are valid, while their estimates (Cogley and Sbordone 2008, henceforth CS08) always are; and (3) the estimates in CS08, in terms of goodness of fit, are just as good as other, much different estimates in our paper. We show in this reply that the exact closed-form estimates are virtually the same as the "quasi" closed-form estimates. Our estimates are consistent with the implicit assumptions ...
Working Paper
Closed-form estimates of the New Keynesian Phillips curve with time-varying trend inflation
We compare estimates of the New Keynesian Phillips Curve (NKPC) when the curve is specified in two different ways. In the standard difference equation (DE) form, current inflation is a function of past inflation, expected future inflation, and real marginal costs. The alternative closed form (CF) specification explicitly solves the DE form to express inflation as a function of past inflation and a present-discounted value of current and expected future marginal costs. The CF specification places model-consistent constraints on expected future inflation that are not imposed in the DE form. In ...
Working Paper
State-dependent pricing and optimal monetary policy
This paper analyzes optimal monetary policy under precommitment in a state-dependent pricing (SDP) environment. Under SDP, monopolistically competitive firms are allowed to endogenously change the timing of price adjustments. I show that this endogenous timing of price adjustment alters the tradeoff and the cost of inflation variation faced by the monetary authority in comparison to the standard time-dependent pricing (TDP) assumption. In particular, it is desirable to let inflation vary more under SDP. Despite the change in the policy tradeoff, however, the optimal response under SDP to ...
Working Paper
Estimation of forward-looking relationships in closed form: an application to the New Keynesian Phillips curve
We illustrate the importance of placing model-consistent restrictions on expectations in the estimation of forward-looking Euler equations. In two-stage limited-information settings where first-stage estimates are used to proxy for expectations, parameter estimates can differ substantially, depending on whether these restrictions are imposed or not. This is shown in an application to the New Keynesian Phillips Curve (NKPC), first in a Monte Carlo exercise, and then on actual data. The closed-form (CF) estimates require by construction that expectations of inflation be model-consistent at all ...