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Working Paper
Endogenous Labor Supply in an Estimated New-Keynesian Model: Nominal versus Real Rigidities
The deep deterioration in the labor market during the Great Recession, the subsequent slow recovery, and the missing disinflation are hard to reconcile for standard macroeconomic models. We develop and estimate a New-Keynesian model with financial frictions, search and matching frictions in the labor market, and endogenous intensive and extensive labor supply decisions. We conclude that the estimated combination of the low degree of nominal wage rigidities and high degree of real wage rigidities, together with the small role of pre-match costs relative to post-match costs, are key in ...
Working Paper
Pricing decisions in an experimental dynamic stochastic general equilibrium economy
We construct experimental economies, populated with human subjects, with a structure based on a nonlinear version of the New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model. We analyze the behavior of firms' pricing decisions in four different experimental economies. We consider how well the experimental data conform to a number of accepted empirical stylized facts. Pricing patterns mostly conform to these patterns. Most price changes are positive, and inflation is strongly correlated with average magnitude, but not the frequency, of price changes. Prices are affected negatively ...
Working Paper
Endogenous Labor Supply in an Estimated New-Keynesian Model: Nominal versus Real Rigidities
The deep deterioration in the labor market during the Great Recession, the subsequent slow recovery, and the missing disinflation are hard to reconcile for standard macroeconomic models. We develop and estimate a New-Keynesian model with financial frictions, search and matching frictions in the labor market, and endogenous intensive and extensive labor supply decisions. We conclude that the estimated combination of the low degree of nominal wage rigidities and high degree of real wage rigidities, together with the small role of pre-match costs relative to post-match costs, are key in ...
Working Paper
Inflation Expectations and Monetary Policy Design: Evidence from the Laboratory
Using laboratory experiments within a New Keynesian framework, we explore the interaction between the formation of inflation expectations and monetary policy design. The central question in this paper is how to design monetary policy when expectations formation is not perfectly rational. Instrumental rules that use actual rather than forecasted inflation produce lower inflation variability and reduce expectational cycles. A forward-looking Taylor rule where a reaction coefficient equals 4 produces lower inflation variability than rules with reaction coefficients of 1.5 and 1.35. Inflation ...
Working Paper
Duration Dependence, Monetary Policy Asymmetries, and the Business Cycle
We produce business cycle chronologies for U.S. states and evaluate the factors that change the probability of moving from one phase to another. We find strong evidence for positive duration dependence in all business cycle phases but find that the effect is modest relative to other state- and national-level factors. Monetary policy shocks also have a strong influence on the transition probabilities in a highly asymmetric way. The effect of policy shocks depends on the current state of the cycle as well as the sign and size of the shock.
Working Paper
The Hidden Heterogeneity of Inflation Expectations and its Implications
Using a new consumer survey dataset, we document a new dimension of heterogeneity in inflation expectations that has implications for consumption and saving decisions as well as monetary policy transmission. We show that German households with the same inflation expectations differently assess whether the level of expected inflation and of nominal interest rates is appropriate or too high/too low. The `hidden heterogeneity' in expectations stemming from these opinions is related to demographic characteristics and affects current and planned spending in addition to the Euler equation effect of ...
Working Paper
Endogenous Labor Supply in an Estimated New-Keynesian Model: Nominal versus Real Rigidities
The deep deterioration in the labor market during the Great Recession, the subsequent slow recovery, and the missing disinflation are hard to reconcile for standard macroeconomic models. We develop and estimate a New-Keynesian model with financial frictions, search and matching frictions in the labor market, and endogenous intensive and extensive labor supply decisions. We conclude that the estimated combination of the low degree of nominal wage rigidities and high degree of real wage rigidities, together with the small role of pre-match costs relative to post-match costs, are key in ...
Working Paper
Are Survey Expectations Theory-Consistent? The Role of Central Bank Communication and News
In this paper we analyze whether central bank communication can facilitate the understanding of key economic concepts. Using survey data for consumers and professionals, we calculate how many of them have expectations consistent with the Fisher Equation, the Taylor rule and the Phillips curve and test, by accounting for three different communication channels, whether central banks can influence those. A substantial share of participants has expectations consistent with the Fisher equation, followed by the Taylor rule and the Phillips curve. We show that having theory-consistent expectations ...
Working Paper
Inflation and Deflationary Biases in Inflation Expectations
We explore the consequences of losing confidence in the price-stability objective of central banks by quantifying the inflation and deflationary biases in inflation expectations. In a model with an occasionally binding zero-lower-bound constraint, we show that an inflation bias as well as a deflationary bias exist as a steady-state outcome. We assess the predictions of this model using unique individual-level inflation expectations data across nine countries that allow for a direct identification of these biases. Both inflation and deflationary biases are present (and sizable) in inflation ...
Working Paper
When is the Fiscal Multiplier High? A Comparison of Four Business Cycle Phases
We synthesize the recent, at times conflicting, empirical literature regarding whether fiscal policy is more effective during certain points in the business cycle. Evidence of state dependence in the multiplier depends critically on how the business cycle is defined. Estimates of the fiscal multiplier do not change when the unemployment rate is above or below its trend. However, we find that the multiplier is higher when the unemployment rate is increasing relative to when it is decreasing. This result holds using both a long time-series at the U.S. national level and for a panel of U.S. ...