This paper examines a model of dynamic price adjustment based on the assumption that information disseminates slowly throughout the population. Compared to the commonly used sticky-price model, this sticky-information model displays three, related properties that are more consistent with accepted views about the effects of monetary policy. First, disinflations are always contractionary (although announced disinflations are less contractionary than surprise ones). Second, monetary policy shocks have their maximum impact on inflation with a substantial delay. Third, the change in inflation is positively correlated with the level of economic activity.

/pdf/sticky-information-versus-sticky-prices-a-proposal-to-it706y12ah.pdf

Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve

Bank Regulation and Supervision: What Works Best?

This paper examines a model of dynamic price adjustment based on the assumption that information disseminates slowly throughout the population. Compared with the commonly used sticky-price model, this sticky-information model displays three related properties that are more consistent with accepted views about the effects of monetary policy. First, disine ations are always contractionary (although announced disine ations are less contractionary than surprise ones). Second, monetary policy shocks have their maximum impact on ine ation with a substantial delay. Third, the change in ine ation is positively correlated with the level of economic activity. The dynamic effects of aggregate demand on output and ine ation remain a theoretical puzzle for macroeconomists. In recent years, much of the literature on this topic has used a model of time-contingent price adjustment. This model, often called “ the new Keynesian Phillips curve,” builds on the work of Taylor [1980], Rotemberg [1982], and Calvo [1983]. As the recent survey by Clarida, Gali, and Gertler [1999] illustrates, this model is widely used in theoretical analysis of monetary policy. McCallum [1997] has called it “ the closest thing there is to a standard specie cation.” Yet there is growing awareness that this model is hard to square with the facts. Ball [1994a] shows that the model yields the surprising result that announced, credible disine ations cause booms rather than recessions. Fuhrer and Moore [1995] argue that it cannot explain why ine ation is so persistent. Mankiw [2001] notes that it has trouble explaining why shocks to monetary policy have a delayed and gradual effect on ine ation. These problems appear to arise from the same source: although the price level is sticky in this model, the ine ation rate can change quickly. By contrast, empirical analyses of the ine ation process (e.g., Gordon [1997]) typically give a large role to “ ine ation inertia.”

/pdf/sticky-information-versus-sticky-prices-a-proposal-to-5ci05av6sr.pdf

Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve

are price decreases. (3) The frequency of price increases covaries strongly with inflation, whereas the frequency of price decreases and the size of price increases and price decreases do not. (4) The frequency of price change is highly seasonal: it is highest in the first quarter and then declines. (5) We find no evidence of upwardsloping hazard functions of price changes for individual products. We show that the first, second, and third facts are consistent with a benchmark menu-cost model, whereas the fourth and fifth facts are not.

/pdf/five-facts-about-prices-a-reevaluation-of-menu-cost-models-35l383bzoq.pdf

Five Facts about Prices: A Reevaluation of Menu Cost Models

The research in Psychology and Economics (a.k.a. Behavioral Economics) suggests that individuals deviate from the standard model in three respects: (1) nonstandard prefer- ences, (2) nonstandard beliefs, and (3) nonstandard decision making. In this paper, I survey the empirical evidence from the field on these three classes of deviations. The evidence covers a number of applications, from consumption to finance, from crime to voting, from charitable giving to labor supply. In the class of nonstandard preferences, I discuss time preferences (self-control problems), risk preferences (reference depen- dence), and social preferences. On nonstandard beliefs, I present evidence on overcon- fidence, on the law of small numbers, and on projection bias. Regarding nonstandard decision making, I cover framing, limited attention, menu effects, persuasion and social pressure, and emotions. I also present evidence on how rational actors—firms, employers, CEOs, investors, and politicians—respond to the nonstandard behavior described in the survey. Finally, I briefly discuss under what conditions experience and market interactions limit the impact of the nonstandard features.

/pdf/psychology-and-economics-evidence-from-the-field-518as6novo.pdf

Psychology and Economics: Evidence from the Field

Analyzing 50 years of inflation expectations data from several sources, we document substantial disagreement among both consumers and professional economists about expected future inflation. This disagreement shows substantial variation over time, moving with inflation, the absolute value of the change in inflation, and relative price variability. We argue that a satisfactory model of economic dynamics must address these important business-cycle moments. Noting that most macroeconomic models do not endogenously generate disagreement, we show that a simple sticky-information model broadly matches many of these facts. Moreover, the sticky-information model is consistent with other observed departures of inflation expectations from full rationality, including autocorrelated forecast errors and insufficient sensitivity to recent macroeconomic news.

/pdf/disagreement-about-inflation-expectations-12ez7cscqb.pdf

Disagreement about Inflation Expectations

This paper assesses the cross country `stylised facts' on empirical measures of the losses incurred during periods of banking crises. We first consider the direct resolution costs to the government and then the broader costs to the welfare of the economy – proxied by losses in GDP. We find that the cumulative output losses incurred during crisis periods are large, roughly 15–20%, on average, of annual GDP. In contrast to previous research, we also find that output losses incurred during crises in developed countries are as high, or higher, on average, than those in emerging-market economies. Moreover, output losses during crisis periods in developed countries also appear to be significantly larger – 10–15% – than in neighbouring countries that did not at the time experience severe banking problems. In emerging-market economies, by contrast, banking crises appear to be costly only when accompanied by a currency crisis. These results seem robust to allowing for macroeconomic conditions at the outset of crisis – in particular low and declining output growth – that have also contributed to future output losses during crises episodes.

Ricardo Reis

Papers

Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve

Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve

Disagreement about Inflation Expectations

Costs of banking system instability: Some empirical evidence☆

The persistence of inflation in the United States