Accounting for Post-Crisis Inflation and Employment: A Retro Analysis

Fratto, Chiara; Uhlig, Harald

doi:10.3386/w20707

“…Despite the generally low correlation of the price shock process during the pre-crisis period, we see that its outcome is driven by a sequence of positive innovations during the crisis period. This …nding is in line with Fratto and Uhlig [73], who found that price markup shocks played an important role to avoid an even larger fall in in ‡ation during the crisis, and contributed to the slow decline in employment during the post-crisis recovery. 16 The wage markup shock process does not display any clear pattern after the pre-crisis period, but it is clear that its variance has increased since the end of the 1990s suggesting that the model provides a less accurate description of wage-setting behavior in the U.S. labor market since then.…”

Section: G O Vern M En T S P En D I N G S H O Ck P Ro Cesssupporting

confidence: 76%

“…Schorfheide [51] and Fratto and Uhlig [73]. These positive markup shocks disappear completely in our version of the SW-model, in which we implement the ZLB, and that feature an even higher degree of nominal stickiness.…”

Section: The Cost Channel Of …Nancial Spreads and In ‡Ation Dynamicsmentioning

confidence: 95%

Challenges for Central Banks’ Macro Models

Lindé

¹

,

Smets

²

,

Wouters

³

2016

Handbook of Macroeconomics

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The Working Paper series presents reports on matters in the sphere of activities of the Riksbank that are considered to be of interest to a wider public. Terms of use: Documents inThe papers are to be regarded as reports on ongoing studies and the authors will be pleased to receive comments.The opinions expressed in this article are the sole responsibility of the author(s) and should not be interpreted as reflecting the views of Sveriges Riksbank. Challenges for Central Banks'Macro Models AbstractIn this paper we discuss a number of challenges for structural macroeconomic models in the light of the Great Recession and its aftermath. It shows that a benchmark DSGE model that shares many features with models currently used by central banks and large international institutions has di¢ culty explaining both the depth and the slow recovery of the Great Recession. In order to better account for these observations, the paper analyses three extensions of the benchmark model. First, we estimate the model allowing explicitly for the zero lower bound constraint on nominal interest rates. Second, we introduce time-variation in the volatility of the exogenous disturbances to account for the non-Gaussian nature of some of the shocks. Third and …nally, we extend the model with a …nancial accelerator and allow for time-variation in the endogenous propagation of …nancial shocks. All three extensions require that we go beyond the linear Gaussian assumptions that are standard in most policy models. We conclude that these extensions go some way in accounting for features of the Great Recession and its aftermath, but they do not su¢ ce to address some of the major policy challenges associated with the use of non-standard monetary policy and macroprudential policies. JEL Classi…cation: E52, E58

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“…The set of competitors endogenously changes as it becomes profitable for new firms to export (Endogenous Entry assumption). By the Productivity Heterogeneity assumption, only the most productive 1 A non-exhaustive list of publications on that question includes Kohn (2006), Bernanke (2007), or, more recently, Ball and Mazumder (2011), Peach et al (2011), Gordon (2013), International Monetary Fund (2013), Fratto and Uhlig (2014), Coibion and Gorodnichenko (2015), Blanchard et al (2015). In a different approach, Gopinath et al (2012) also study the dynamic properties of prices over the business cycle, but they focus specifically on trade prices during the trade collapse -from August 2008 to March 2009.…”

Section: Introductionmentioning

confidence: 99%

Globalization, Market Structure and Inflation Dynamics

Guilloux-Nefussi

¹

2016

SSRN Journal

11

0

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The decline in the sensitivity of inflation to domestic slack observed in developed countries since the mid 1980's has been often attributed to globalization. However, this intuition has so far not been formalized. I develop a general equilibrium setup in which the sensitivity of inflation to marginal cost decreases when international trade costs fall. In order to do so, I add three ingredients to an otherwise standard two-country new-Keynesian model. Strategic interactions generate a time varying desired markup; endogenous entry and heterogeneous productivity engender a self-selection of the most productive firms (also the largest ones) in international trade. Hence the weight of large firms in domestic production increases. These firms transmit less marginal cost fluctuations to price adjustments, rather absorbing them into their desired markup in order to protect their market share. At the aggregate level, domestic inflation reacts less to real activity fluctuations.

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“…The set of competitors endogenously changes as it becomes profitable for new firms to export (Endogenous Entry assumption). By the Productivity Heterogeneity assumption, only the most productive 1 A non-exhaustive list of publications on that question includes Kohn (2006), Bernanke (2007), or, more recently, Ball and Mazumder (2011), Peach et al (2011), Gordon (2013), International Monetary Fund (2013), Fratto and Uhlig (2014), Coibion and Gorodnichenko (2015), Blanchard et al (2015). In a different approach, Gopinath et al (2012) also study the dynamic properties of prices over the business cycle, but they focus specifically on trade prices during the trade collapse -from August 2008 to March 2009.…”

Section: Introductionmentioning

confidence: 99%

Globalization, Market Structure and Inflation Dynamics

Guilloux-Nefussi¹

2016

gwp

1

0

View full text Add to dashboard Cite

The decline in the sensitivity of inflation to domestic slack observed in developed countries since the mid 1980's has been often attributed to globalization. However, this intuition has so far not been formalized. I develop a general equilibrium setup in which the sensitivity of inflation to marginal cost decreases when international trade costs fall. In order to do so, I add three ingredients to an otherwise standard two-country new-Keynesian model. Strategic interactions generate a time varying desired markup; endogenous entry and heterogeneous productivity engender a self-selection of the most productive firms (also the largest ones) in international trade. Hence the weight of large firms in domestic production increases. These firms transmit less marginal cost fluctuations to price adjustments, rather absorbing them into their desired markup in order to protect their market share. At the aggregate level, domestic inflation reacts less to real activity fluctuations.

show abstract

Accounting for Post-Crisis Inflation and Employment: A Retro Analysis

Cited by 16 publications

References 22 publications

Challenges for Central Banks’ Macro Models

Challenges for Central Banks’ Macro Models

Globalization, Market Structure and Inflation Dynamics

Globalization, Market Structure and Inflation Dynamics

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