Microeconometric evidence on demand-side real rigidity and implications for monetary non-neutrality

To model the observed slow response of aggregate real variables to nominal shocks, most macroeconomic models incorporate real rigidities in addition to nominal rigidities. One popular way of modelling such a real rigidity is to assume a non-constant demand elasticity. By using a homescan data set for three European countries, including prices and quantities bought for a large number of goods, in addition to consumer characteristics, we provide estimates of price elasticities of demand and on the degree of demand-side real rigidities. We find that price elasticities of demand are about 4 in the median. Furthermore, we find evidence for demand-side real rigidities. These are, however, much smaller than what is often assumed in macroeconomic models. The median estimate for demand-side real rigidity, the super-elasticity, is in a range between 1 and 2. To quantitatively assess the implications of our empirical estimates, we calibrate a menu-cost model with the estimated super-elasticity. We find that the degree of monetary non-neutrality doubles in the model including demand-side real rigidity, compared to the model with only nominal rigidity, suggesting a multiplier effect of around two. However, the model can explain only up to 6% of the monetary non-neutrality observed in the data, implying that additional multipliers are necessary to match the behavior of aggregate variables

Microeconometric evidence on demand-side real rigidity and implications for monetary non-neutrality

To model the observed slow response of aggregate real variables to nominal shocks, most macroeconomic models incorporate real rigidities in addition to nominal rigidities. One popular way of modelling such a real rigidity is to assume a non-constant demand elasticity. By using a homescan data set for three European countries, including prices and quantities bought for a large number of goods, in addition to consumer characteristics, we provide estimates of price elasticities of demand and on the degree of demand-side real rigidities. We find that price elasticities of demand are about 4 in the median. Furthermore, we find evidence for demand-side real rigidities. These are, however, much smaller than what is often assumed in macroeconomic models. The median estimate for demand-side real rigidity, the super-elasticity, is in a range between 1 and 2. To quantitatively assess the implications of our empirical estimates, we calibrate a menu-cost model with the estimated super-elasticity. We find that the degree of monetary non-neutrality doubles in the model including demand-side real rigidity, compared to the model with only nominal rigidity, suggesting a multiplier effect of around two. However, the model can explain only up to 6% of the monetary non-neutrality observed in the data, implying that additional multipliers are necessary to match the behavior of aggregate variables

Tracking Inflation on a Daily Basis

Using online data for prices and real-time debit card transaction data on changes in expenditures for Switzerland allows us to track inflation on a daily basis. While the daily price index fluctuates around the official price index in normal times, it drops immediately after the lockdown related to the COVID19 pandemic. Official statistics reflect this drop only with a lag, specifically because data collection takes time and is impeded by lockdown conditions. Such daily real-time information can be useful to gauge the relative importance of demand and supply shocks and thus inform policymakers who need to determine appropriate policy measures

Employment Adjustment and Financial Constraints - Evidence from Firm-level Data

Firms adjust their employment to changes in output. But they tend to adjust it only partially. Typically, labor is hoarded in downturns and subsequently rms have to hire less in upturns. Investment in labor hoarding may therefore be in uenced by factors that impede investments, such as nancial constraints. Using rm-level data, we show that nancial constraints increase the sensitivity of employment to  uctuations in output considerably. When output changes, nancially constrained rms resize their labor force substantially more than rms that have abundant funding. Limited internal funding opportunities turn out to be just as important as the reduced access to external nance. The strongest impact, however, is observed when internal and external constraints occur jointly. In that case, rms lay o two-and-a-half times more employees than unconstrained rms. The amplifying eect of nancial constraints is similar in upturns and downturns, implying that nancially constrained rms not only reduce their workforce more when demand decreases, but they also hire more labor when demand increases

Employment Adjustment and Financial Tightness - Evidence from Firm-level Data

Firms tend to only partially adjust their workforce to changes in output. Typically, labour is hoarded in downturns; subsequently, firms have to hire less workers in upturns, but they can do so only if they can bear the current costs of keeping superfluous workers so that the firms can save rehiring costs in the future. Therefore, labour hoarding can be seen as an investment and may be influenced by factors, such as the firms' financial shortages, that tend to impede investments. Using Swiss firm-level data, we show that for firms in financially strained situations, the sensitivity of employment to fluctuations in output increases considerably. When output changes, financially tighter firms resize their labour force more than firms that have abundant funding. Both limited internal funding opportunities as well as the reduced access to external finance are important. The strongest impact, however, is observed when internal and external financial tightness occur jointly. In that case, compared to firms that are not in a financially strained situation, firms in a financially strained situation lay off twice as many employees. The amplifying effect of financial tightness is similar in upturns and downturns, implying that financially tight firms not only reduce their workforce more when demand decreases but also hire more labour when demand increases

Exchange rate and foreign GDP elasticities of Swiss exports across sectors and destination countries

This article uses a detailed breakdown of Swiss trade flows to identify how the impact of the two main determinants of Switzerland’s exports – foreign demand and the real exchange rate – varies across sectors and export destinations. Our main findings are that (i) both foreign demand and exchange rate elasticities vary substantially across both export sectors and export destinations. (ii) Foreign demand trends are more important for structural considerations than the exchange rate. This is due to the fact that exports of the two largest export sectors are relatively sensitive to long-run foreign demand developments while they are relatively insensitive to changes in the exchange rate. (iii) The sectoral structure of Switzerland’s exports has shifted towards goods that have a lower short-run demand elasticity and a higher long-run demand elasticity. Goods exports are thus less influenced by business cycle fluctuations while they benefit more from long-term growth trends. (iv) The export share of sectors with a relatively low exchange rate elasticity has increased. However, this result is mainly driven by the strong rise in exports of chemicals and pharmaceuticals as well as precision instruments and watches, which are also the two important sectors responsible for the Swiss trade surplus

Sources of Bias in Inflation Rates and Implications for Inflation Dynamics

Official statistics measuring the cost of living are known to suffer from several biases because they often do not accurately capture substitution patterns, product entry/exit, and preference shifts. In particular, the latter two biases have been shown to be large on average. This paper shows that the size of the biases can also vary with economic conditions. Using AC Nielsen homescan data for Switzerland around the 2015 appreciation of the CHF against the EUR, which resulted in a substantial shift in relative prices, it is first shown that official price indexes can be tracked using homescan data when applying the same methodology as that of the statistical office. Then, the often-acknowledged traditional substitution bias arising from lagged expenditure weights is shown to be relatively small. Based on an approach that allows for preference shocks and product entry/exit (unied price index), the two further biases, that is, the consumer valuation bias and the variety adjustment bias, are evaluated. Both are large on average and of similar size, together resulting in a 3.7 percentage point bias in the annual in ation rate. Furthermore, the bias is particularly large in the aftermath of the 2015 appreciation, increasing to 5.3 percentage points. In particular consumer valuation is shown to contribute signicantly to the increase in the bias after the exchange-rate shock. The unified price index declines by 2.4 times more than the traditional Fisher index, suggesting that taking into account the time-variation in the bias is important

Exchange Rates and Prices: Evidence from the 2015 Swiss Franc Appreciation

The removal of the lower bound on the EUR/CHF exchange rate in January 2015 provides a unique setting to study the implications of a large and sudden appreciation in an otherwise stable macroeconomic environment. Using transaction-level data on non-durable goods purchases by Swiss consumers, we measure the response of border and consumer retail prices to the CHF appreciation and how household expenditures responded to these price changes. Consumer prices of imported goods and of competing Swiss-produced goods fell by more in product categories with larger reductions in border prices and a lower share of CHF-invoiced border prices. These price changes resulted in substantial expenditure switching between imported and Swiss-produced goods. While the frequency of import retail price reductions rose in the aftermath of the appreciation, the average size of these price reductions fell (and more so in product categories with larger border price declines and a lower share of CHF-invoiced border prices), contributing to low pass-through into import prices

Media Reporting and Business Cycles: Empirical Evidence based on News Data

Recent literature suggests that news shocks could be an important driver of economic cycles. In this article, we use a direct measure of news sentiment derived from media reports. This allows us to examine whether innovations in the reporting tone correlate with changes in the assessment and expectations of the business situation as reported by rms in the German manufacturing sector. We nd that innovations in news reporting aect business expectations, even when conditioning on the current business situation and industrial production. The dynamics of the empirical model conrm theoretical predictions that news innovations aect real variables such as production via changes in expectations. Looking at individual sectors within manufacturing, we nd that macroeconomic news is at least as important for business expectations as sector-specic news. This is consistent with the existence of information complementarities across sectors