State-Dependent Pricing and the Non-Neutrality of Money

Golosov and Lucas (2007) have challenged the view that infrequent price adjustments by firms explains why money has aggregate real output effects. The basis of their challenge is the 'selection effect' - re-setting firms are not selected at random, they are those firms whose prices are furthest from equilibrium. Because of this the aggregate price level is sufficiently flexible for monetary neutrality. In this paper I add price review costs to an otherwise standard Golosov and Lucas model. This weakens the selection effect and restores monetary non-neutrality to a level comparable to that of the Calvo (1983) pricing model.menu-cost, information costs, non-neutrality of money, state-dependent pricing, time-dependent pricing.

Cointegration-based tests of the New Keynesian Model of inflation

We show that the New-Keynesian (NK) model of inflation can be interpreted as a forward-looking cointegrated model. This allows us to model firms' expectations about marginal costs in a simple VAR framework and develop relatively simple formal tests of the model which bypass the econometric problems faced by other approaches. We show that a series of Granger-causality tests can indicate whether there is some forward-looking component to price setting. We implement these tests using quarterly data for the UK and the US. We find that the NK model is formally rejected but that there is strong evidence of a forward looking component to price setting.new-Keynesian, inflation, coeintegration

Inflation Dynamics and Inflation Regimes

In this paper we develop and estimate a new-Keynesian model of inflation and use it to investigate the hypothesis that prices in the UK are re-set more frequently during periods of high inflation. In the model, firms are assumed to condition their expectations on an optimally-selected but incomplete information set and we further assume that the probability that they will reset their price in any quarter depends upon the prevailing inflationary regime. The model implies more complex inflation dynamics than conventional new-Keynesian models predict. We find that we cannot reject the formal restrictions implied by the model (using UK quarterly data) and we estimate that the mean time before prices were reset was around eight months during the 'high' inflationary regime and approximately two years when mean inflation was 'low'.Rational expectations, incomplete information, macroeconomic dynamics, regime switching

Demographic Change and the UK Savings Rate

We use microeconomic data to explore the effects of a changing age-structure on the UK's aggregate personal savings rate. Our findings suggest that changes to the population's age structure age have had detectable, sustained, but, relative to the yearly changes observed in the savings rate over the previous century, modest effects on aggregate personal sector savings. We estimate that the projected changes to the UK's age structure over the next 40 years are likely to raise the UK's savings rate but by no more than 2 percentage points. We find no basis for the view that the aggregate savings rate will decline as a result of the anticipated ageing of the UK population.Saving, ageing population

Optimally Rational Expectations and Macroeconomics

This paper provides an alternative to the theory of rational expectations (RE). Its central idea is that the information set on which agents will choose to condition their expectations will not, in general, include all the available information. Our alternative has many of the attractive features of RE; it emerges from an explicit choice-theoretic framework; it has wide applicability; and it can in principle explain the failure of models incorporating RE to account for the dynamics of many macroeconomic relationships.Rational expectations, incomplete information, macroeconomic dynamics

Informational Accuracy and the Optimal Monetary Regime

King (1997) develops a framework for assessing four monetary regimes: an optimal state-contingent rule; a non-contingent rule; pure discretion; and a Rogoffian conservative central banker. Using this framework we show (a) that King is wrong to claim that it implies that an optimally-conservative central banker always dominates a fixed-rule monetary regime; (b) that if the private sector has a signal of the shock to which monetary policy responds - the accuracy of which is exogenously fixed - then either the optimal state-contingent rule or the optimally-conservative central bank can dominate; and (c) that if the private sector optimally chooses the accuracy of its signal then any regime can dominate.Monetary policy, expectations, Rogoffian central banker.

Relative Prices as Aggregate Supply Shocks with Trend Inflation

This paper modifies the menu-cost model that Ball and Mankiw (1995) put forward to explain the correlation between the first- and higher-moments of the distribution of US price changes by allowing for non-zero trend inflation. Simulations suggest that even if trend inflation is only mildly positive - such as the 3 percent per annum experienced by the US in the last 50 years - the predictions of the Ball and Mankiw model are greatly altered. We then show that some of these predictions are rejected by annual post-WW2 US data.Inflation, menu-cost, relative price variance, relative price skewness, skew-normal.