Inflation persistence when price stickiness differs between industries

There is much evidence that price-adjustment frequencies vary widely across industries. This paper shows that inflation persistence is lower with heterogeneity in price stickiness than without it, taking as given the degree of persistence in variables affecting inflation. Differences in the frequency of price adjustment mean that the pool of firms which responds to any macroeconomic shock is unrepresentative, containing a disproportionately large number of firms from industries with more flexible prices. Consequently, this group of firms is more likely to reverse any initial price change after a shock has dissipated, making inflation persistence much harder to explain

Intrinsic Inflation Persistence

It is often argued that the New Keynesian Phillips curve is at odds with the data because it cannot explain inflation persistence — the difficulty of returning inflation immediately to target after a shock without any loss of output. This paper explains how a model where newer prices are stickier than older prices is consistent with this phenomenon, even though it introduces no deviation from optimizing, forwards-looking price setting. The probability of adjusting new and old prices is estimated using a novel method that draws only on macroeconomic data, and the findings strongly support the premise of the model.inflation persistence, hazard function, time-dependent pricing, New Keynesian Phillips curve

Inflation Persistence When Price Stickiness Differs Between Industries

There is much evidence that price-adjustment frequencies vary widely across industries. This paper shows that inflation persistence is lower with heterogeneity in price stickiness than without it, taking as given the degree of persistence in variables affecting inflation. Differences in the frequency of price adjustment mean that the pool of firms which responds to any macroeconomic shock is unrepresentative, containing a disproportionately large number of firms from industries with more flexible prices. Consequently, this group of firms is more likely to reverse any initial price change after a shock has dissipated, making inflation persistence much harder to explain.Inflation persistence, heterogeneity, price stickiness, New Keynesian Phillips Curve

A Model of Equilibrium Institutions

Institutions that serve the interests of an elite are often cited as an important reason for poor economic performance. This paper builds a model of institutions that allocate resources and power to maximize the payoff of an elite, but where any group that exerts sufficient fighting effort can launch a rebellion that destroys the existing institutions. The rebels are then able to establish new institutions as a new elite, which will similarly face threats of rebellion. The paper analyses the economic consequences of the institutions that emerge as the equilibrium of this struggle for power. High levels of economic activity depend on protecting private property from expropriation, but the model predicts this can only be achieved if power is not as concentrated as the elite would like it to be, ex post. Power sharing endogenously enables the elite to act as a government committed to property rights, which would otherwise be time inconsistent. But sharing power entails sharing rents, so in equilibrium power is too concentrated, leading to inefficiently low investment.institutions, political economy, power struggle, property rights, time inconsistency

Robustly Optimal Monetary Policy

This paper analyses optimal monetary policy in response to shocks using a model that avoids making specific assumptions about the stickiness of prices, and thus the nature of the Phillips curve. Nonetheless, certain robust features of the optimal monetary policy commitment are found. The optimal policy rule is a flexible inflation target which is adhered to in the short run without any accommodation of structural inflation persistence, that is, inflation which it is costly to eliminate. The target is also made more stringent when it has been missed in the past. With discretion on the other hand, the target is loosened to accommodate fully any structural inflation persistence, and any past deviations from the inflation target are ignored. These results apply to a wide range of price stickiness models because the market failure which the policymaker should aim to mitigate arises from imperfect competition, not from price stickiness itself.Inflation persistence, optimal monetary policy, rules versus discretion,stabilization bias, inflation targeting

Political specialization

This paper presents a theory of political specialization in which some countries uphold the rule of law while others consciously choose not to do so, even though they are ex ante identical. This is borne out of two key insights: for incumbents in each country, (i) the first steps to the rule of law have the greatest private cost, and (ii) steps taken by some countries in the direction of the rule of law make it less attractive for others to follow the same path. The world equilibrium features a symbiotic relationship between despotic and rule-of-law economies: by producing technology-intensive goods that require protection of property rights, rule-of-law economies raise the relative price of natural resources and increase incentives for despotism in other countries; while the choice of despotism entails a positive externality because cheap oil makes the rule of law more attractive elsewhere in the world

The decision to move house and aggregate housing-market dynamics

Using data on house sales and inventories, this paper shows that housing-market dynamics are driven mainly by listings and less so by transaction speed, thus the decision to move house is key to understanding the housing market. The paper builds a model where moving house is essentially an investment in match quality, implying that moving depends on macroeconomic developments and housing-market conditions. The endogeneity of moving means there is a cleansing effect — those at the bottom of the match quality distribution move first — which generates overshooting in aggregate variables. The model is applied to the 1995–2004 housingmarket boom

Conventional and unconventional monetary policy rules

This essay examines the challenges in devising rules for unconventional monetary policy suitable for a post-crisis world. It is argued that unconventional monetary policy instruments are a poor substitute for conventional interest-rate policy in stabilizing the economy and in insulating monetary policy from political pressures. Some suggestions for the reform of inflation targeting are made to reduce the need for unconventional policy instruments in the future

Debt and incomplete financial markets: a case for nominal GDP targeting

Financial markets are incomplete, thus for many households borrowing is possible only by accepting a financial contract that specifies a fixed repayment. However, the future income that will repay this debt is uncertain, so risk can be inefficiently distributed. This paper argues that a monetary policy of nominal GDP targeting can improve the functioning of incomplete financial markets when incomplete contracts are written in terms of money. By insulating households' nominal incomes from aggregate real shocks, this policy effectively completes financial markets by stabilizing the ratio of debt to income. The paper argues the objective of replicating complete financial markets should receive substantial weight even in an environment with other frictions that have been used to justify a policy of strict inflation targeting

Guarding the guardians

Good government requires some restraints on the powerful, but how can those be impose if there is no-one above them? This paper studies the equilibrium allocation of power and resources established by self-interested incumbents under the threat of rebellions from inside and outside the group in power. Commitment to uphold individuals' rights can only be achieved if power is not as concentrated as incumbents would like it to be, ex post. Power sharing endogenously enables incumbents to commit to otherwise time-inconsistent laws by ensuring more people receive rents under the status quo, and thus want to defend it