Category Archives: Article

A Kinked‐Demand Theory of Price Rigidity

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Abstract

I provide a microfounded theory for one of the oldest, but so far informal, explanations of price rigidity: the kinked-demand curve theory. Kinked-demand curves arise when some customers observe at no cost only the price at the store they are at. At the microlevel, the kinked-demand theory predicts that prices should be more likely to change if they have recently changed, and more flexible in markets where customers can more easily compare prices. At the macrolevel, it captures a part of the inflation/output trade-off that is not shifted by inflation expectations and therefore persists in the long run.

The (Ir)Relevance of Rule‐of‐Thumb Consumers for U.S. Business Cycle Fluctuations

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Abstract

We estimate a medium-scale model with and without rule-of-thumb consumers over the pre-Volcker and the Great Moderation periods, allowing for indeterminacy. Passive monetary policy and sunspot fluctuations characterize the pre-Volcker period for both models. In both subsamples, the estimated fraction of rule-of-thumb consumers is low, such that the two models are empirically almost equivalent; they yield very similar impulse response functions, variance, and historical decompositions. We conclude that rule-of-thumb consumers are irrelevant to explain aggregate U.S. business cycle fluctuations.

Government Spending, Debt Management, and Wealth and Income Inequality in a Growing Monetary Economy*

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Abstract

This paper compares the impact of government investment and government consumption on macroeconomic aggregates and inequality when the government deficit is money-financed while maintaining a fixed debt-money ratio. Real aggregate quantities are independent of the debt-money ratio, as is wealth inequality, but income inequality is impacted. We also investigate the impact of these two forms of government expenditure on the macroeconomic aggregates and distributions, illustrating their sharply contrasting effects on the tradeoffs they entail. While government investment is more effective in increasing the growth rate and moderating inflation, it has a more adverse effect on long-run income inequality.

Wealth, Portfolios, and Nonemployment Duration

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Abstract

We use administrative data on individual balance sheets in Denmark to document how an individual's financial position affects job search behavior. We look at the effect of wealth at the entry into unemployment on the exit rate from unemployment as well as the effect on the subsequent match quality. The detailed data allow us not only to distinguish between liquid and illiquid parts, but also to decompose each of them into assets and liabilities. The decomposition of wealth into these four components is key to understanding how wealth affects job finding rates. In particular, we show that liquid assets reduce the probability of becoming reemployed, but we do not see an effect of liquid liabilities or the illiquid wealth components, while interest payments speed up reemployment. The results on subsequent match quality in form of job duration and wages are mixed.

How Do Mortgage Rate Resets Affect Consumer Spending and Debt Repayment? Evidence from Canadian Consumers

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Abstract

One of the most important channels through which monetary policy affects the real economy is changes in mortgage rates. This paper studies the effects of mortgage rate changes resulting from monetary policy shifts on homeowners' spending, debt repayment, and defaults. The Canadian institutional setting facilitates the design of identification strategies for causal inference, since the vast majority of mortgages in the country experience predetermined, periodic, and automatic contract renewals with the mortgage rate reset based on the prevailing market rate. This allows us to exploit quasi-random variation in the timing of the rate reset and to present causal evidence for both rate declines and increases using detailed, representative consumer credit panel data. We find asymmetric effects of rate changes on spending, debt repayment, and defaults. Our results can be rationalized by the conventional cash-flow effect in conjunction with changes in consumer expectations about future interest rates upon the reset. Given the pervasiveness of Canadian-type mortgages in many other OECD countries, our findings have broader implications for the transmission of monetary policy to the household sector.

Managing Bubbles in Experimental Asset Markets with Monetary Policy

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Abstract

We study the effect of a “leaning against the wind” monetary policy on asset price bubbles in a learning-to-forecast experiment, where prices are driven by the expectations of market participants. We find that a strong interest rate response is successful in preventing or deflating large price bubbles, while a weak response is not. Giving information about the interest rate changes and communicating the goal of the policy increases coordination of expectations and has a stabilizing effect. When the steady-state fundamental price is unknown and the interest rate rule is based on a proxy instead, the policy is less effective.

Revisiting Real Wage Rigidity

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Abstract

In this paper, we provide empirical evidence that real wage rigidity is not a major cause of unemployment volatility. We argue that there is a disconnect between the theoretical and empirical literatures on this topic. While theoretical studies define real wage rigidity as the response of wages to changes in unemployment following productivity shocks, the empirical literature measures real wage rigidity as the estimated semi-elasticity of wages with respect to unemployment, averaged over all shocks. We show that averaging over shocks gives a biased measure of real wage rigidity, as the impact of other shocks confounds the response to productivity shocks. Our results indicate that the estimated semi-elasticity with respect to productivity shocks is twice as large as the estimated semi-elasticity averaged over all shocks. This implies that one cannot attribute unemployment volatility to real wage rigidity.

Argument by False Analogy: The Mistaken Classification of Bitcoin as Token Money

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Abstract

This paper documents inconsistent terminologies and misleading analogies in current discussions of digital money and payments. It offers a more consistent framework for understanding the potential of technological innovation in providing the functions of money and payments: as media of exchange, stores of value, and units of account and the implications of cryptographic technologies underpinning cryptocurrencies for the future of money and payments. These could support efficiency gains in money and payments, but decentralization is not inherent to their application. Radical reform leading to improved economic outcomes is conceivable, but not through disruptive displacement of existing institutional arrangements.

Unconventional Monetary Policy and the Behavior of Shorts

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Abstract

We investigate the behavior of shorts, considered sophisticated investors, before and after a set of Federal Reserve unconventional monetary policy announcements that spot bond markets did not fully anticipate. Short interest in agency securities systematically predicts bond price changes and other asset returns on the days of monetary announcements, particularly when growth or monetary news is released, indicating shorts correctly anticipate these surprises. Shorts also systematically rebalance after announcements in the direction of the announcement surprise when the announcement releases monetary or growth news, suggesting that shorts interpret these announcements to imply further yield changes in the same direction.

Is Macroprudential Policy Instrument Blunt? Empirical Analysis Based on Japan’s Experience from the 1970s to the 1990s

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Abstract

Macroprudential instruments, especially sectoral instruments, are considered to be precise tools that work only in areas of concern. However, it has not yet been fully tested in practice whether they affect only the targeted sectors and do not have undesirable spillover effects on nontargeted sectors. To fill this gap, we empirically study the impact of an instrument called Quantitative Restriction (QR), a policy tool used in Japan in the 1990s to curb excessive land price rises by requiring banks to contain real estate lending. We use narrative records to construct QR shocks and estimate their impact using a factor-augmented vector autoregression (FAVAR). Our findings are summarized as follows. First, contractionary QR shocks reduced not only real estate lending and land prices, but also lending to other industries, putting downward pressure on the macroeconomy and lowering bank solvency. Second, industry groups and banks with balance sheets that were more exposed to changes in land prices and real estate transactions responded greater to these shocks, illustrating the role of balance sheet composition in spillovers and the importance of choosing the right timing for implementation following these shocks, suggesting that there may have been leakages through these institutions. Third, some nonbank financial institutions that were not required to report the loan results to the authorities did not reduce their lending following these shocks, which accords with the view that there were leakages through these institutions.