Inflation Targets, Credibility and Persistence In a Simple Sticky-Price Framework

An important trend in macroeconomic research in recent years involves the increased use of optimization-based models with nominal rigidities (such as sticky prices) to analyse how monetary policy affects the economy and how optimal policy should be designed. This paper presents a re-formulated version of a commonly-used baseline sticky-price model that has been extended to account for variations over time in the central bank's inflation target. We derive a closed-form solution for the model and analyse its properties under various parameter values. The model is used to explore topics relating to the effects of disinflationary monetary policies and inflation persistence. In particular, we employ the model to illustrate and assess the critique that standard sticky-price models generate counterfactual predictions for the effects of monetary policy.

Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics

Recent years have seen an important trend in macroeconomic research towards analysing business cycles and stabilization policy in the context of models that incorporate both nominal rigidities and optimising agents with rational expectations. The canonical specification for the behaviour of inflation in these sticky-price rational expectations models (which is known as the new-Keynesian Phillips curve) is often criticized on the grounds that it fails to account for the dependence of inflation on its own lags. In response, many recent studies have employed a “hybrid” sticky-price specification in which inflation depends on a weighted average of lagged and expected future values of itself, in addition to a driving variable such as the output gap. In this paper, we consider some simple tests of the hybrid model that are derived from the model's closed-form solution. Our results suggest that the hybrid model provides a poor description of empirical inflation dynamics, and that there is little evidence of the type of rational forward-looking behavior implied by the model.

A Note on the Cointegration of Consumption, Income, and Wealth

Lettau and Ludvigson (2001) argue that a log-linearized approximation to an aggregate budget constraint predicts that log consumption, assets, and labour income will be cointegrated. They conclude that this cointegrating relationship is present in U.S. data, and that the estimated cointegrating residual forecasts future asset growth. This note examines whether the cointegrating relationship suggested by Lettau and Ludvigson's theoretical framework actually exists. We demonstrate that we cannot reject the hypothesis that cointegration is absent from the data once we employ measures of consumption, assets, and labor income that are jointly consistent with an underlying budget constraint. By contrast, Lettau and Ludvigson use a set of variables that do not belong together in an aggregate budget constraint, thereby testing a cointegrating relationship that is not implied by their theory.

Coupling of Length Scales and Atomistic Simulation of MEMS Resonators

We present simulations of the dynamic and temperature dependent behavior of Micro-Electro-Mechanical Systems (MEMS) by utilizing recently developed parallel codes which enable a coupling of length scales. The novel techniques used in this simulation accurately model the behavior of the mechanical components of MEMS down to the atomic scale. We study the vibrational behavior of one class of MEMS devices: micron-scale resonators made of silicon and quartz. The algorithmic and computational avenue applied here represents a significant departure from the usual finite element approach based on continuum elastic theory. The approach is to use an atomistic simulation in regions of significantly anharmonic forces and large surface area to volume ratios or where internal friction due to defects is anticipated. Peripheral regions of MEMS which are well-described by continuum elastic theory are simulated using finite elements for efficiency. Thus, in central regions of the device, the motion of millions of individual atoms is simulated, while the relatively large peripheral regions are modeled with finite elements. The two techniques run concurrently and mesh seamlessly, passing information back and forth. This coupling of length scales gives a natural domain decomposition, so that the code runs on multiprocessor workstations and supercomputers. We present novel simulations of the vibrational behavior of micron-scale silicon and quartz oscillators. Our results are contrasted with the predictions of continuum elastic theory as a function of size, and the failure of the continuum techniques is clear in the limit of small sizes. We also extract the Q value for the resonators and study the corresponding dissipative processes.Comment: 10 pages, 10 figures, to be published in the proceedings of DTM '99; LaTeX with spie.sty, bibtex with spiebib.bst and psfi

On the Relationships Between Real Consumption, Income, and Wealth

The existence of durable goods implies that the welfare flow from consumption cannot be directly associated with total consumption expenditures. As a result, tests of standard theories of consumption (such as the Permanent Income Hypothesis, or PIH) typically focus on nondurable goods and services. Specifically, these studies generally relate real consumption of nondurable goods and services to measures of real income and wealth, where the latter are deflated by a price index for total consumption expenditures. This paper demonstrates that this procedure is only valid under the assumption that real consumption of nondurables and services is a constant multiple of aggregate real consumption outlays---an assumption that represents a very poor description of U.S. data. The paper develops an alternative approach that is based on the observation that the ratio of these series has historically been stable in nominal terms, and uses this approach to examine two basic predictions of the PIH. We obtain significantly different results relative to the traditional approach.

The Supply Shock Explanation of the Great Stagflation Revisited

U.S. inflation data exhibit two notable spikes into the double-digit range in 1973-1974 and again in 1978-1980. The well-known “supply-shock” explanation attributes both spikes to large food and energy shocks plus, in the case of 1973-1974, the removal of price controls. Yet critics of this explanation have (a) attributed the surges in inflation to monetary policy and (b) pointed to the far smaller impacts of more recent oil shocks as evidence against the supply-shock explanation. This paper reexamines the impacts of the supply shocks of the 1970s in the light of the new data, new events, new theories, and new econometric studies that have accumulated over the past quarter century. We find that the classic supply-shock explanation holds up very well; in particular, neither data revisions nor updated econometric estimates substantially change the evaluations of the 1972-1983 period that were made 25 years (or more) ago. We also rebut several variants of the claim that monetary policy, rather than supply shocks, was really to blame for the inflation spikes. Finally, we examine several changes in the economy that may explain why the impacts of oil shocks are so much smaller now than they were in the 1970s.

Faculty Teaching Improvement: Opportunities Within a Graduate Student & Faculty Community of Practice

Improving higher-education teaching is a growing focus on American colleges. A program was developed to train current PhD students in effective pedagogy practices. The Community of Practice resulted in current teaching faculty pedagogical improvement

The Supply-Shock Explanation of the Great Stagflation Revisited

U.S. inflation data exhibit two notable spikes into the double-digit range in 1973-1974 and again in 1978-1980. The well-known "supply-shock" explanation attributes both spikes to large food and energy shocks plus, in the case of 1973-1974, the removal of price controls. Yet critics of this explanation have (a) attributed the surges in inflation to monetary policy and (b) pointed to the far smaller impacts of more recent oil shocks as evidence against the supply-shock explanation. This paper reexamines the impacts of the supply shocks of the 1970s in the light of the new data, new events, new theories, and new econometric studies that have accumulated over the past quarter century. We find that the classic supply-shock explanation holds up very well; in particular, neither data revisions nor updated econometric estimates substantially change the evaluations of the 1972-1983 period that were made 25 years (or more) ago. We also rebut several variants of the claim that monetary policy, rather than supply shocks, was really to blame for the inflation spikes. Finally, we examine several changes in the economy that may explain why the impacts of oil shocks are so much smaller now than they were in the 1970s.

Por que achamos que as expectativas de inflação são importantes para a inflação? (E devemos pensar nisso?)

Economists and economic policymakers believe that households’ and firms’ expectations of future inflation are a key determinant of real inflation. A review of the relevant theoretical and empirical literature suggests that this belief rests on unsound foundations and leads to the argument that adhering to it uncritically could easily result in serious policy errors.Los economistas y los diseñadores de política económica creen que las expectativas de los hogares y las empresas acerca de la inflación futura son un factor determinante de la inflación real. Un examen de la literatura teórica y empírica pertinente sugiere que esta creencia se basa en fundamentos poco sólidos y lleva a argumentar que adoptarla en forma acrítica puede conducir fácilmente a graves errores de política económica.Economistas e formuladores de políticas acreditam que as expectativas das famílias e das empresas sobre a inflação futura são um dos principais determinantes da inflação real. Uma revisão da literatura teórica e empírica relevante sugere que essa crença é baseada em fundamentos instáveis e leva ao argumento de que a adoção acrítica pode facilmente levar a sérios erros de política

Intentional STEM Infusion (ISI) Approach for 4-H Non-STEM Project Volunteers: Finding STEM in Plain Sight

STEM literacy is identified as a necessary skill for participation in the future workforce. 4-H has responded to this need to develop STEM-ready youth by expanding access to project areas like Robotics. It has been acknowledged that recruiting and training STEM competent staff and volunteers is a limitation in expanding these types of programs. At the same time, 4-H youth are enrolled in many traditional non-STEM projects that are imbued with STEM concepts. 4-H volunteers with increased awareness of their role in fostering STEM education and STEM literacy can be a valuable resource in preparing 4-H youth with STEM-ready professional skills. 4-H professionals can train front-line volunteers to use an intentional STEM infusion approach within the experiential learning process. It is posited that volunteers will be better able to facilitate STEM learning in real-world contexts for a wide-range of 4-H youth by using this approach. The use of the ISI approach provides an opportunity for 4-H to develop more STEM-ready youth than by only serving those youths who are attracted to STEM-focused projects alone