Globalization and Inflation Dynamics: the Impact of Increased Competition

This paper analyzes the potential effect of global market competition on inflation dynamics. It does so through the lens of the Calvo model of staggered price-setting, which implies that inflation depends on expected future inflation and a measure of marginal costs. I modify the assumption of a constant elasticity of demand, standard in this model, to provide a channel through which an increase in the number of traded goods may affect the degree of strategic complementarity in price setting, and hence alter the dynamic response of inflation to marginal costs. I first discuss the behavior of the variables that drive the impact of trade openness on this response, and then I evaluate whether an increase in the variety of traded goods of the size observed in the US in the `90s might have a sizable quantitative impact. I find that it is difficult to argue that such an increase in trade should have generated an increase in US market competition leading to a decline in the slope of the inflation-marginal cost relation.

A Search for a Structural Phillips Curve*

The foundation of the New Keynesian Phillips curve is a model of price setting with nominal rigidities which implies that the dynamics of inflation are well explained by the evolution of real marginal costs. The objective of this paper is to analyze whether this is a structurally-invariant relationship. To assess this, we first estimate an unrestricted time-series model for inflation, unit labor costs, and other variables, and present evidence that their joint dynamics are well represented by a vector autoregression with drifting coefficients and volatilities, as in Cogley and Sargent (2004). Then, following Sbordone (2002, 2003), we apply a two-step minimum distance estimator to estimate deep parameters. Taking as given estimates of the unrestricted VAR, we estimate parameters of the NKPC by minimizing a quadratic function of the restrictions that the theoretical model imposes on the reduced form. Our results suggest that it is possible to reconcile a constant-parameter NKPC with the drifting-parameter VAR, and therefore we argue that the price-setting model is structurally invariant.Inflation; Phillips curve; time-varying VAR.

Sources of New York employment fluctuations

The authors analyze employment growth in the metropolitan region and its relationship to employment in the United States as a whole. They identify a strong cyclical link between the region and the nation, punctuated by occasional, persistent shifts in the region's underlying growth rate. Some shifts are found to be related to industry factors, such as the restructuring of financial services in the late 1980s. However, the authors attribute a large and increasing share of New York employment fluctuations to region-specific factors.Employment (Economic theory) ; New York (N.Y.) ; Federal Reserve District, 2nd

Policy analysis using DSGE models: an introduction

Many central banks have come to rely on dynamic stochastic general equilibrium, or DSGE, models to inform their economic outlook and to help formulate their policy strategies. But while their use is familiar to policymakers and academics, these models are typically not well known outside these circles. This article introduces the basic structure, logic, and application of the DSGE framework to a broader public by providing an example of its use in monetary policy analysis. The authors present and estimate a simple New Keynesian DSGE model, highlighting the core features that this basic specification shares with more elaborate versions. They then apply the estimated model to study the sources of the sudden increase in inflation that occurred in the first half of 2004. One important lesson derived from this exercise is that the management of expectations can be a more effective tool for stabilizing inflation than actual movements in the policy rate. This result is consistent with the increasing focus on the pronouncements of central bankers regarding their future actions.Econometric models ; Stochastic analysis ; Keynesian economics ; Inflation (Finance) ; Monetary policy ; Banks and banking, Central

U.S. Wage and Price Dynamics: A Limited-Information Approach

This paper analyzes the dynamics of prices and wages using a limited-information approach to estimation. I estimate a two-equation model for the determination of prices and wages derived from an optimization-based dynamic model, where both goods and labor markets are monopolistically competitive, prices and wages can be reoptimized only at random intervals, and, when not reoptimized, can be partially adjusted to previous-period aggregate inflation. The estimation procedure is a two-step minimum-distance estimation, which exploits the restrictions that the model imposes on a time-series representation of the data. In the first step I estimate an unrestricted autoregressive representation of the variables of interest. In the second step, I express the model solution in the form of a constrained autoregressive representation of the data and define the distance between unconstrained and constrained representations as a function of the structural parameters that characterize the joint dynamics of inflation and labor share. This function summarizes the cross-equation restrictions between the model and the time-series representations of the data: I then estimate the parameters of interest by minimizing a quadratic function of that distance. I find that the estimated dynamics of prices and wages track actual dynamics quite well, and that the estimated parameters are consistent with the observed length of nominal contracts