ASYMMETRY IN THE EFFECTS OF MONETARY AND GOVERNMENT SPENDING SHOCKS: CONTRASTING EVIDENCE AND IMPLICATIONS

Using quarterly data for the United States, demand contraction exceeds expansion in the face of monetary and government spending shocks. Demand contraction in the face of government spending shocks, is absorbed in nominal wage and price deflation. The variability of government spending shocks decreases average wage and price inflation. In contrast, the upward flexibility of price appears in sharp contrast to its downward rigidity in the face of monetary shocks. Furthermore, output contraction is notably larger relative to expansion in the face of monetary shocks. Monetary variability accelerates average price inflation and decreases average output and real wage growth.     

CYCLICAL COMOVEMENTS IN INDUSTRIAL LABOR AND PRODUCT MARKETS: THEORY AND EVIDENCE

We establish the theoretical connection between industrial labor and product markets within the contractual wage-rigidity new Keynesian explanation of business cycles. We estimate time-series and cross-sectional regressions for 28 private two-digit (S.I.C.) industries and find: (i) greater uncertainty is associated with upward flexibility of the nominal wage and moderates the countercyclical response of the real wage to aggregate demand shocks; (ii) an upwardly rigid nominal wage response to energy price shocks reduces the real contractionary effects of these shocks; (Hi) downwardly inflexible nominal wages are associated with downwardly rigid prices in response to productivity shocks.     

PRICE FLEXIBILITY AND AGGREGATE STABILITY: NEW EVIDENCE AND IMPLICATIONS

The relation between price flexibility and aggregate real stability has been subject to recent debate. Increased price flexibility decreases the response of real output to aggregate demand shifts and, in turn, is stabilizing. The increased flexibility may exacerbate, however, the size of demand shifts induced by a given underlying shock. If the latter channel dominates, increased flexibility may prove destabilizing. This paper examines the real effects of specific shocks underlying aggregate demand across a group of eighteen major industrial countries. The stabilizing effect of price flexibility appears to dominate.     

THE RELATIVE STICKINESS OF WAGES AND PRICES

While many modern business cycle theories posit the existence of nominal wage and/or output price stickiness, their relative importance remains an unsettled issue. Using a structural VAR model, this paper exploits evidence on the behavior of real wages to assess the relative importance of these two sources of stickiness. The empirical results suggest that a positive shock to aggregate demand causes a significant temporary fall in real wages. This is taken as evidence that sticky wages have played a more important role than sticky prices in transmitting aggregate demand shocks to real economic activity in the post-war U.S. (JEL E32)     

THE CYCLICAL BEHAVIOR OF PRICES AND RELATIVE PRICES

Price and output shock correlations provide information concerning macroeconomic shocks. Previous research generally finds small or negative correlations between real gross domestic product (GDP) and GDP deflator shocks but positive correlations between industrial production (IP) and consumer price index (CPI) shocks at short forecast horizons. We show that mismatched price and output correlations may have different magnitudes or signs than matched pairs. Matched and mismatched correlations between disaggregated prices and output from the GDP accounts indicate the procyclical price of nondurables to durables makes correlations between mismatches misleading. Thus, there is reason to be skeptical of results based on IP and the CPI. (JEL E31, E32)     

ISLANDS, INDEXATION AND MONETARY POLICY

This paper develops a synthesized macroeconomic model that incorporates the local-global informational asymmetries of an "islands" economy into a setting characterized by endogenous wage indexation. In such an economy, agents are unable both to filter out the separate influences of demand and supply shocks on observed output prices and to distinguish between the separate price effects of local and aggregate disturbances, so that optimal wage indexation depends upon both the variances of supply and demand disturbances and the information-conditioned forecasts of agents. As a result, optimal monetary policy generally depends upon the variances of local and aggregate supply and demand.     

THE U.S. LABOR INCOME SHARE AND AUTOMATION SHOCKS

The causes and consequences of the 1964–2016 swings in the U.S. labor income share/labor share (LS) are parsed through the lens of a structural model estimated on aggregate and LS series jointly. Where conventional models fall short, the present model yields a counter-cyclical LS unconditionally and in response to demand and monetary policy shocks, as well as a small wage pro-cyclicality, via moderate wage indexation. Shifts in automation, workers' market power, investment efficiency, and the relative price of investment account for 54%, 24%, 6%, and 4% of LS fluctuations, respectively. Automation shocks explain the lion's share of the post-2007 cyclical LS tumble and 11% of output cycles, and generate a distinctive counter-cyclical labor response. (JEL E32, E25, E52)     

INFLATION AND ASYMMETRIC OUTPUT ADJUSTMENTS BY FIRMS

Using ordered probit analyses of a unique micro data set, we find evidence of output asymmetry that is systematically related to inflation and to price asymmetry. As predicted by theory, firms are more likely at higher rates of inflation to raise prices in response to positive cost and demand shocks and less likely to lower prices in response to negative cost and demand shocks. The expected effects of higher inflation on output asymmetry, however, come primarily from cost and demand increases and to a lesser (and statistically insignificant) extent from cost and demand decreases. (JEL E3, D4)     

FINANCIAL INNOVATION, PRICE SMOOTHING, AND MONETARY POLICY

This paper examines an unregulated transaction services market that is subject to financial innovation in an economy that experiences aggregate supply and demand shocks. The availability of this unregulated market to transactors smooths the price response to these shocks. However, financial innovations act as money supply shocks that increase price disturbances. If there is persistence in the real aggregate supply shocks and in the rate of adoption of financial innovations, then the central bank can forecast some portion of the changes in transaction requirements that accompany these shocks and damp the residual variation in prices by accommodating these anticipated needs.     

ON INFLATION AND REAL PRICE VARIABILITY

This paper studies the consequences of costly price adjustments for the variability of real prices accompanying inflation. For constant-elasticity demand and cost of production it is shown that a higher demand, a lower cost of production, or a lower cost of price adjustment leads to less intertemporal variability of real prices. If the marginal cost of production does not increase "too" fast, then the average real price is less than the real price that would prevail in the absence of inflation; additionally, a higher demand, a lower cost of production, or a lower cost of price adjustment leads to a higher level of real prices.     

FACTOR DEMAND UNDER CONDITIONS OF PRODUCT DEMAND and SUPPLY UNCERTAINTY

The paper develops a theory of factor demand under uncertainty, that encompasses neo-classical factor demand and Keynesian effective factor demand as special cases. The model allows factor demand and output to move positively with product demand, even with a constant product price. This, in turn, permits real wages to move pro-cyclically in response to product demand shocks. In addition the model provides a new perspective on the "adding-up" problem (which posits that total factor payments exceed output if increasing returns to scale exist), and generates positive uncertainty profits that are similar in spirit to those of Frank Knight.     

STRUCTURAL ESTIMATION OF THE OUTPUT GAP: A BAYESIAN DSGE APPROACH

We estimate the output gap that is consistent with a standard New Keynesian dynamic stochastic general equilibrium (DSGE) model, where the output gap is defined as a deviation of output from its flexible‐price equilibrium, using Bayesian methods. Our output gap illustrates the U.S. business cycles well, compared with other estimates. We find that the main source of the output gap movements is the demand shocks, but that the productivity shocks contributed to the stable output gap in the late 1990s. The robustness analysis shows that the estimated output gap is sensitive to the specification for monetary policy rules. (JEL E30, E32, C11)     

SPECULATIVE INTENSITY AND SPOT AND FUTURES PRICE VARIABILITY

This paper develops a simultaneous stochastic rational-expectations model of futures- and spot-price determination. Using the model, we find that increases in what we term speculative intensity increase spot-price variability arising from storage-cost shocks, but decrease spot-price variability arising from demand shocks. In contrast, increases in speculative intensity unambiguously decrease futures-price variability, regardless of the underlying source of disturbances. We are able to develop these comparative-static results because the model has a unique equilibrium.     

THE SWINGS OF U.S. INFLATION AND THE GIBSON PARADOX

In recent business cycles, U.S. inflation has experienced a reduction of volatility and a severe weakening in the correlation to the nominal interest rate (Gibson paradox). We examine these facts in an estimated dynamic stochastic general equilibrium model with money. Our findings point at a flatter New Keynesian Phillips Curve (higher price stickiness) and a lower persistence of markup shocks as the main explanatory factors. In addition, a higher interest‐rate elasticity of money demand, an increasing role of demand‐side shocks, and a less systematic behavior of Fed's monetary policy also account for the recent patterns of U.S. inflation dynamics. (JEL E32, E47)     

GOVERNMENT INTERVENTION,LAND MARKET,AND URBAN DEVELOPMENT: EVIDENCE FROM CHINESE CITIES

This article investigates how government intervention in land market affects China's urban development, using data from prefecture‐level cities between 2000 and 2010. We find that government intervention enlarges the impact of positive productivity shocks on housing price appreciation, through mainly the government control over residential land supply. However, we find no significant evidence that high government intervention constrains population growth and leads to wage increase. Such patterns of urban dynamics can be explained by the fact that migrant workers are the driving force behind China's urbanization, but they have limited housing demand and are not well compensated. (JEL P52, R12, H11)     

DETERMINING OUTPUT AND INFLATION VARIABILITY: ARE THE PHILLIPS CURVE AND THE MONETARY POLICY REACTION FUNCTION RESPONSIBLE?

This study analyzes the policy parameters in a Taylor monetary policy reaction function and a Phillips curve equation to determine the variability of inflation and output. The theoretical and empirical investigations yield two key results. First, countries with large parameters in the monetary policy reaction function have low and stable inflation. Second, countries with flatter Phillips curves (i.e., those with a higher degree of price stickiness) have larger output variability. This article also examines the determinants of inflation and output variability as well as determinants of the slope of the Phillips curve.(JEL E32 , E52 )     

LIMITED ASSET MARKET PARTICIPATION,STICKY WAGES,AND MONETARY POLICY

A small amount of nominal wage stickiness makes limited asset market participation (LAMP) irrelevant for the design of monetary policy. Recent research argues that LAMP could invert the slope of the IS curve in otherwise standard New Keynesian models. This, in turn, implies that optimal monetary policy rules should be passive. We show that the so‐called inverted aggregate demand logic (IADL) relies on nominal wage flexibility. Outside of extreme parameterizations, wage stickiness prevents the inversion of the slope of the IS curve. Hence, LAMP does not generally alter the trade‐offs faced by a welfare maximizing Central Bank, and for this reason it does not fundamentally affect the design of optimal simple rules and optimal monetary policy. (JEL E21, E52)     

BASHING AND COERCION IN MONETARY POLICY

Political pressure, or "bashing," by the administration is typically believed to be one way that the administration can coerce an otherwise independent central bank into following the administration's preferred monetary policy path. This paper develops a model for analyzing this type of policy "cooperation" and demonstrates that bashing the central bank creates uncertainty on the part of private agents with regard to future policy actions, which translates into real wage and output variability. Hence, although beneficial to the administration, political pressure creates uncertainty and thus economic instability.     

Wage indexation: Social benefits and private incentives

The question addressed in this paper is: Do social benefits from wage indexation coincide with private incentives to incorporate COLA clauses in union contracts? In general, market forces provide an “approximately correct” solution so that legislative remedies are not required. Based on the work of Gray and Fischer, full indexation is beneficial when the economy is subjected to stochastic nominal shocks, but only partial indexation is optimal when real disturbances dominate. If unions and management of firms are risk-averse they both have an incentive to adopt full indexation when monetary uncertainty exists. On the other hand, when the economy faces real shocks, union negotiators oppose indexation if the demand for labor is elastic, but insist on full indexation if demand is inelastic. Managers of firms prefer nominal wage contracts in either case. This suggests that both parties will agree to omit COLA clauses in the first case, but are likely to compromise with partial indexation in the second case. A role for government intervention is indicated only to the extent that bargaining strength may dictate a degree of indexation that deviates from the social optimum. The analysis is extended briefly to other assumptions about the utility function of the two parties at the bargaining table.     

ASYMMETRIES IN THE RESPONSES OF REGIONAL JOB FLOWS TO OIL PRICE SHOCKS

This paper studies the effect of oil price innovations on manufacturing job flows across U.S. states. First, I estimate a nonlinear structural equation model and compute impulse response functions by Monte Carlo integration. I find asymmetries in the responses of job flows to positive and negative oil price innovations. Yet, these asymmetries do not pass a test of symmetry on the impulse responses, especially after accounting for data mining. Third, I use a test for the absence of job reallocation to evaluate whether an unexpected increase in the real price of oil price triggers an important change in job reallocation. I find that oil price shocks have limited regional allocative effects. (JEL E24, E32, Q43)