Estimating a high-frequency New Keynesian Phillips curve

This paper estimates a high-frequency New Keynesian Phillips curve via the Generalized Method of Moments. Allowing for higher-than-usual frequencies strongly mitigates the well-known problems of small-sample bias and structural breaks. Applying a daily frequency allows us to obtain estimates for the Calvo parameter of nominal rigidity over a very short period - for instance for the recent financial and economic crisis - which can then be easily transformed into their monthly and quarterly equivalences and be employed for the analysis of monetary and fiscal policy. With Argentine data from the end of 2007 to the beginning of 2011, we estimate the daily Calvo parameter and find that on average, prices remain fixed for approximately two to three months which is in line with recent microeconomic evidence. --Calvo Staggering,High-Frequency NKM,GMM

Envy, Guilt, and the Phillips Curve

We incorporate inequity aversion into an otherwise standard New Keynesian dynamic equilibrium model with Calvo wage contracts and positive inflation. Workers with relatively low incomes experience envy, whereas those with relatively high incomes experience guilt. The former seek to raise their income, and latter seek to reduce it. The greater the inflation rate, the greater the degree of wage dispersion under Calvo wage contracts, and thus the greater the degree of envy and guilt experienced by the workers. Since the envy effect is stronger than the guilt effect, according to the available empirical evidence, a rise in the inflation rate leads workers to supply more labor over the contract period, generating a significant positive long-run relation between inflation and output (and employment), for low inflation rates. This Phillips curve relation, together with an inefficient zero-inflation steady state, provides a rationale for a positive long-run inflation rate. Given standard calibrations, optimal monetary policy is associated with a long-run inflation rate around 2 percent.inflation, long-run Phillips curve, fairness, inequity aversion

Envy, guilt, and the Phillips curve

We incorporate inequity aversion into an otherwise standard New Keynesian dynamic equilibrium model with Calvo wage contracts and positive inflation. Workers with relatively low incomes experience envy, whereas those with relatively high incomes experience guilt. The former seek to raise their income, and the latter seek to reduce it. The greater the inflation rate, the greater the degree of wage dispersion under Calvo wage contracts, and thus the greater the degree of envy and guilt experienced by the workers. Since the envy effect is stronger than the guilt effect, according to the available empirical evidence, a rise in the inflation rate leads workers to supply more labor over the contract period, generating a significant positive long-run relation between inflation and output (and employment), for low inflation rates. This Phillips curve relation, together with an inefficient zero-inflation steady state, provides a rationale for a positive long-run inflation rate. Given standard calibrations, optimal monetary policy is associated with a long-run inflation rate around 2 percent. --inflation,long-run Phillips curve,fairness,inequity aversion

Inequality aversion and the long-run effectiveness of monetary policy: Bilateral versus group comparison

In this paper we incorporate the two most prominent approaches of inequality aversion, i.e. Fehr and Schmidt (1999) and Bolton and Ockenfels (2000) into an otherwise standard New Keynesian macro model and compare them with respect to their influence on the long-run effectiveness of monetary policy. We find that the choice for Fehr and Schmidt or Bolton and Ockenfels like preferences is of importance only for the quantitative - but not the qualitative - effectiveness of monetary policy in the long-run

On the Introduction of Firing Costs

This paper analysis two types of firing costs in a New Keynesian model with search and matching frictions and purely endogenous separations. We further distinguish between the effects resulting from respecting and non-respecting the bonding critique. We find that the two types of firing costs similarly influence the model dynamics and generate comparable second business cycle moments. However, the decision whether to respect or disrespect the bonding critique is crucial for the evolution of the system dynamics. This is especially true, when comparing American and European calibration

Estimating a high-frequency New-Keynesian Phillips curve

This paper estimates a high-frequency New Keynesian Phillips curve via the Generalized Method of Moments. Allowing for higher-thanusual frequencies strongly mitigates the well-known problems of smallsample biases and structural breaks. Applying a daily frequency allows us to obtain eventspecific estimates for the Calvo parameter of nominal rigidity - for instance for the recent financial and economic crisis -, which can be easily transformed into their weekly, monthly and quarterly equivalences to be employed for the analysis of eventspecific monetary and fiscal policy. With Argentine data from the end of 2007 to the beginning of 2011, we find the daily Calvo parameter to vary in a very close range around 0.97, which implies averagely fixed prices of approximately 40 days or equivalently one and a half month or a little less than half a quarter. This has strong implication for the modeling of monetary policy analysis since it implies that at a quarterly frequency a flexible price model has to be employed. In the same vein, to analyze monetary policy in a sticky price framework, a monthly model seems more appropriate

State-dependence vs. timedependence: An empirical multi-country investigation of price sluggishness

In this paper we empirically investigate the time- and state-dependent behavior of aggregate price setting. We implement a testing procedure by means of a nonparametric representation of the structural form New Keynesian Phillips curve. By means of the so-called functional coefficient regression we allow for potential dependence of the Calvo (1983) parameter on inflation and inflation uncertainty. Thus, we can test for state-dependence of the Calvo parameter in a straightforward way. To address residual heteroscedasticity in the inference process regarding functional dependence, we make use of the factor-based bootstrap. We confirm that the Calvo scheme is a rather restrictive model of aggregate price setting. Moreover, it is documented that a number of shortcomings of empirical NKPC model representations in explaining inflation data may be addressed by means of a state-dependent pricing rule. In particular, problems of insignificant or even implausibly negative estimates of the relation between inflation and marginal costs are considerably reduced in the framework of our more general NKPC specification

On the introduction of firing costs

This paper provides a survey of the recent literature about firing costs and discusses the transmission channels of firing costs in a partial equilibrium context. In addition, we expand our analysis two types of firing costs in a New Keynesian model with purely endogenous separations. We further distinguish between the effects resulting from respecting and non-respecting the bonding critique. We find that the two types of firing costs do not show significant differences. However, respecting the bonding critique enhances the overall performance of the model

Estimating a high-frequency New Keynesian Phillips curve

This paper estimates a high-frequency New Keynesian Phillips curve via the Generalized Method of Moments. Allowing for higher-than-usual frequencies strongly mitigates the well-known problems of small-sample bias and structural breaks. Applying a daily frequency allows us to obtain estimates for the Calvo parameter of nominal rigidity over a very short period - for instance for the recent financial and economic crisis - which can then be easily transformed into their monthly and quarterly equivalences and be employed for the analysis of monetary and fiscal policy. With Argentine data from the end of 2007 to the beginning of 2011, we estimate the daily Calvo parameter and find that on average, prices remain fixed for approximately two to three months which is in line with recent microeconomic evidence