Browsing by Subject "Inflation expectations"

Now showing 1 - 4 of 4

Essays on imperfect information and imperfect competition
(2017-05) Afrouzi Khosroshahi, Hassan; Coibion, Olivier; Bhattarai, Saroj; Gorodnichenko, Yuriy; Glover, Andrew S; Bhaskar, Venkataraman
This dissertation investigates three questions about pricing and information acquisition incentives of imperfectly competitive firms, and studies the macroeconomic implications of those incentives within general equilibrium models. Chapter 1 studies why in countries where inflation has been low and stable, price setters display highly dispersed aggregate inflation expectations; especially so when they face fewer competitors. In contrast to the predictions of standard models, realized inflation deviates significantly from price setters’ aggregate inflation expectations. Instead, their own-industry inflation expectations are more accurate, and aggregate inflation tracks these expectations closely. I propose a new dynamic model of rational inattention with oligopolistic competition to explain these stylized facts. The Phillips curve relates aggregate inflation to price setters’ own-industry inflation expectation, and firms forego learning about aggregate variables to focus on their own-industry prices. This incentive is stronger when every firm faces fewer competitors. Using new firm-level survey evidence, I calibrate the degree of rational inattention and industry size in the model and find that a two-fold increase in the number of competitors reduces the half-life and on-impact response of output to a monetary policy shock by 40 and 15 percent, respectively. Chapter 2 is about the behavior of the price-cost markups. The cyclicality of markups is crucial to understanding the propagation of shocks and the comovement of macroeconomic variables. I show that the degree of inertia in the response of output to shocks is a fundamental determining factor for the cyclicality of markups in a broad class of models. In particular, markups follow a forward looking law of motion in which they depend on firms’ conditional expectations over the net present value of all future changes in output. I test this law of motion with data for firms’ expectations and find that, across different types of microfounded models of cyclical markups, the behavior of firms is most consistent with implicit collusion models. Calibrating an implicit collusion model to the U.S. data, I find that markups are procyclical when the model matches the observed inertial response of output to shocks, as commonly found in the data. Chapter 3 studies the pricing behavior of rationally inattentive firms when they face persistent productivity shocks along with transitory demand shocks. I show that prices respond persistently to transitory demand shocks, as firms optimally choose to be confused about the two types of the shocks. When a positive transitory demand shock is realized, it takes time for firms to disentangle it from a supply shock, during which they act as if there was a negative aggregate productivity shock. Therefore, an expansion caused by a positive demand shock is followed by a recession until firms fully recognize the origin of the change in their optimal price. I also develop a tractable method for solving linear quadratic rational inattention models in continuous time and derive semi-analytical results for impulse response functions of endogenous variables under rational inattention.
Essays on monetary and fiscal policy
(2020-05-01) Yang, Choongryul; Coibion, Olivier; Bhattarai, Saroj; Eusepi, Stefano; Sockin, Michael
My dissertation investigates the transmission of monetary and fiscal policy using both empirical and theoretical frameworks. Chapter 1 examines how the number of products sold by a firm affect its decisions regarding price setting and information acquisition. Using a firm-level survey from New Zealand, I show that firms that produce more goods have both better information about aggregate inflation and more frequent but smaller price changes. To characterize the implications of these empirical findings for the ability of monetary policy to stimulate the economy, I develop a new dynamic general equilibrium model with rationally inattentive multi-product firms that pay a menu cost to reset their prices. I show that the interaction of the menu cost and rational inattention frictions leads firms to adopt a wait-and-see policy and gives rise to a new selection effect: firms have time-varying inaction bands widened by their subjective uncertainty about the economy such that price adjusters choose to be better informed than non-adjusters. This selection effect endogenously generates a distribution of desired price changes with a majority near zero and some very far from zero, which acts as a strong force to amplify monetary non-neutrality. I calibrate the model to be consistent with the micro-evidence on both prices and inattention and find two main quantitative results. First, the new selection effect, coupled with imperfect information of price setters, leads to real effects of monetary policy shocks in the one-good version of the model that are nearly as large as those in the Calvo model. Second, in the two-good version of the model, as firms optimally choose to have better information about monetary shocks, the real effects of monetary policy shocks decline by 20%. In Chapter 2, joint with Hassan Afrouzi, we develop a general equilibrium flexible price model with dynamic rational inattention in which the slope of the Phillips curve is endogenous to systematic aspects of monetary policy. This Phillips curve is flatter when the monetary policy is more hawkish: rationally inattentive firms find it optimal to ignore monetary policy shocks when the monetary authority commits to stabilize nominal variables. Moreover, an unexpectedly more dovish monetary policy leads to a completely flat Phillips curve in the short-run and a steeper Phillips curve in the long-run. We also develop a tractable method for solving general dynamic rational inattention models in linear quadratic Gaussian setups. Chapter 3 asks whether the effectiveness of fiscal stimulus policy depends on the degree of economic income inequality. Many previous works about state-dependence of fiscal multiplier have focused on the degree of slack in the economy. In a surge of concerns about rising inequality of the U.S., I use rich historical state-level data on military procurement and inequality to find the relationship between the degree of income inequality and the local government spending multipliers. I show that the effects of government spending shocks on output are larger in low-inequality states than in high-inequality states. In contrast, I find no evidence that employment multipliers differ by the extent of income inequality. These results are robust to various specifications and other sources of inequality data. I also estimate aggregate output multipliers using historical military spending and income inequality data. I find the evidence that aggregate output multipliers are high when the income inequality is low. Thus, both local and aggregate multipliers are significantly affected by the degree of income inequality of an economy. I consider a variety of potential theoretical explanations for the results, including heterogeneous within-sector inequality and distributional effects of government spending shock, but find that none can adequately explain this finding.
Essays on monetary economics
(2009-12) Hulagu, Timur; Corbae, Dean; Kuruscu, Burhanettin; Freitas, Kripa M.; Azzimonti, Marina; Zarazaga, Carlos E.
In the first chapter, I examine an incomplete markets economy in a politico-economic general equilibrium setting in which the median voter chooses the inflation rate. I use an environment where individuals face an uninsurable idiosyncratic labor productivity shock, and money is the only asset. Being an effective tax on savings, inflation acts as a redistribution mechanism transferring resources from the rich to the poor. I show that the median voter chooses a positive inflation rate as the politico-economic equilibrium outcome. In the second chapter, I analyze how forming a monetary union affects consumption and earnings inequalities through monetary policy changes implied by adopting a common currency. I use a two country open-economy, overlapping-generations model with heterogenous individuals to investigate these effects. In the model, inflation tax is the only redistributive tool and consumption and earnings inequalities are decreasing functions of inflation. When forming a monetary union, countries face a trade-off between the undesirable distributional effects of losing their monetary autonomy and benefits from the elimination of trade frictions. Findings suggest that when countries choose to do so, the country with higher initial inflation will definitely experience a fall in its inflation, hence an increase in its inequalities. In the country with lower initial inflation, however, inflation and inequalities might go in either direction depending on the degree of heterogeneity and the trade dependency between the countries. As the inflationary effect of uniting its monetary policy with a high inflation country can dominate the reducing effect of vanished trade frictions on inflation, this country might have an increase in its inflation, and a decrease in its inequalities. Finally, in the third chapter, I compare the indirect measure of inflation expectations derived by Ireland (1996b) to the direct measures obtained from expectations surveys in two case studies: the US and Turkey. Our results show that the inflation bounds calculated for US data are more volatile than survey results, and are too narrow to contain them due to low standard errors in consumption growth series stemming from high persistence. For the Turkish case, on the other hand, out of three different surveys on inflation expectations in Turkey compared with the bounds computed using Turkish data, expectations obtained by the Consumer Tendency Survey fall within these bounds throughout the whole sample period. Moreover we show that, as Fisher's theory suggests, real interest rates are extremely volatile in Turkey and movements in nominal interest rates cannot be directly used as an indicator of changes in inflation expectations.
Essays on monetary economics and central banking
(2011-08) Ikizler, Devrim; Stinchcombe, Maxwell; Corbae, Dean; Wiseman, Thomas E.; Kuruscu, Burhanettin; Almazan, Andres
In the first chapter, I analyze the US banking industry in order to explain two facts. First, larger banks have lower but less volatile returns on loans compared to smaller banks over the years. Second, larger borrowers have better financial records, i.e. verifiable "hard" information, and they are more likely to match with larger banks, as documented by Berger et al.(2005). I show that these two facts can be explained using a segmented loan markets model with loan contracts between banks and borrowers. Moreover, I show that the difference between the banks returns is not due to diversification advantage of larger banks. Instead, it is because of the fact that larger banks can operate in both large and small loan markets, whereas small banks can only operate in small loans market. Therefore large banks are able to match with larger and less risky borrowers more frequently, which are less likely to default. Moreover, I take the model to infinite horizon allowing bank size to be endogenous to answer multiple policy questions about the future of small business finance and consolidation. I use the data set from the Consolidated Reports of Condition and Income provided by FDIC for 1984-2010 to motivate our research question and to estimate the model. My second chapter revisits the welfare cost of anticipated inflation in an incomplete markets environment where agents can substitute time for money by increasing their shopping frequency. Shopping activity provides an insurance channel to individuals against changes in the return on nominal balances through inflation as documented by Aguiar and Hurst (2007) and McKenzie and Schargrodsky (2011). In my model economy, a higher level of inflation affects people through two channels. First, it distorts the portfolio decision between real and nominal balances, second it redistributes wealth from those who hold more money to those who hold less. People, on average, respond to a higher level of inflation by increasing their price search activity, as they relative return on nominal balances goes down. I find that a 5 percent increase in inflation causes the welfare level go down by 2 percent if people are allowed to substitute time for money, and by 10 percent if we take this channel away from the model. Finally, in the third chapter, I compare the indirect measure of inflation expectations derived by Ireland (1996b) to the direct measures obtained from expectations surveys in multiple countries. Our results show that the inflation bounds calculated for US and UK data are more volatile than survey results, and are too narrow to contain them due to low standard errors in consumption growth series stemming from high persistence. For Chilean and Turkish cases, however, computed bound for inflation expectations seems to fit the survey results better. Out of three different surveys on inflation expectations in Turkey compared with the bounds computed using Turkish data, expectations obtained by the Consumer Tendency Survey fall within these bounds throughout the whole sample period. The success in the Turkish and Chilean cases can be attributed to the fact that volatility in the consumption series, whereas the failure in US and UK cases are most probably stemming from the fact that the current theoretical model is missing a risk-premium component.