WHAT'S SO FUNNY ABOUT MAKING MONETARY POLICY?

During their meetings, the members of the Federal Open Market Committee (FOMC) make monetary policy, but they also make each other laugh. This article studies the amount of laughter elicited by members of the FOMC during their meetings. The study finds that a member elicits more laughter if he or she expects higher inflation, other things being equal. This finding suggests that members may use humor to cope with the threat of inflation. (JEL E52, E58, C23)     

DELIBERATION AND LEARNING IN MONETARY POLICY COMMITTEES

We use records from Federal Open Market Committee (FOMC) meetings to investigate the importance of deliberation and learning in monetary policy decision making in the period from 1970 to 1978 when Arthur Burns served as Chairman. We first propose a model of Bayesian learning in which FOMC members learn from each other as they sequentially reveal their policy preferences in a committee meeting. Then, as an alternative, we investigate a model in which members defer to an emerging consensus. Neither model is supported by the data, suggesting that within‐meeting deliberation might have had little effect on the quality of monetary policy decisions in the Burns era. (JEL E520, E580)     

HEDONIC IMPUTATION AND THE PRICE INDEX PROBLEM: AN APPLICATION TO HOUSING

In this study, we show how use of the hedonic imputation method complicates the price index problem. In addition to the usual choice between formulas such as Fisher and Törnqvist, the fact that index compilers have some discretion over which prices are imputed implies that it is necessary to choose as well between different varieties of each formula. The functional form of the hedonic model must also be taken into account. We illustrate the importance of these issues in a housing context using house price data for three regions in Sydney over a 3‐yr period. (JEL C43, E31, O47, R31)     

AGGREGATION AND THE STAGGERING OF PRICE CHANGES

Temporal distribution of individual price changes is of crucial importance for business cycle theory and for the microfoundations of price adjustment. While it is routinely assumed that price changes are staggered over time, both theory and evidence are ambiguous. We use a large Belgian data set to analyze whether price changes are staggered or synchronized. We find that the more aggregated are the data, the closer is the distribution to perfect staggering. The results hold both for aggregation across products, and across locations. They are consistent with an economy in which idiosyncratic shocks are the main cause of price changes. (JEL E30, E31, D40)     

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)     

AGE,TIME, VINTAGE,AND PRICE INDEXES: MEASURING THE DEPRECIATION PATTERN OF HOUSES

Age, time, and vintage are key determinants of house prices, yet they cannot be included together linearly or as dichotomous variables in hedonic regressions as construction time + age of house = sale time. We introduce a method where the estimates of the age, time, and vintage effects on prices are obtained in a flexible manner, without requiring us to specify a pre‐determined functional form for any of these variables. Applying our method to Dutch data, we find that the estimated depreciation pattern over the life of houses does not follow the functional forms typically specified for the age of houses in hedonic regressions. (JEL C43, E01, E31, R31)     

DISAGGREGATE EVIDENCE ON PRICE STICKINESS AND IMPLICATIONS FOR MACRO MODELS

We use the methodology applied at the aggregate level by Gali and Gertler (1999) to analyze price and cost data for U.S. six‐digit North American Industry Classification System (NAICS) industries. Industries with price adjustment periods of at least 6 quarters generate no more than about 43% of total sales of industries we analyze. Industries with estimated price adjustment speeds of less than a year generate at least 44% of sales. Our conclusion is that disaggregate U.S. data provide as much support in favor of relatively high price flexibility as they do for the assumption of widespread price stickiness utilized in many modern macroeconomic theories. (JEL E31, L16)     

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)     

MONETARY NEUTRALITY UNDER EVOLUTIONARY DOMINANCE OF BOUNDED RATIONALITY

We provide evolutionary game‐theoretic microfoundations to a dynamic complete nominal adjustment in response to a monetary shock by introducing a novel analytical notion that we call boundedly rational inattentiveness. We investigate the behavior of the general price level in a context where a firm can either pay a cost (featuring a random component) to update its information set and establish the optimal price (Nash strategy) or freely use non‐updated information and establish a lagged optimal price (bounded rationality strategy). We devise evolutionary microdynamics (with and without mutation) that, by interacting with the dynamics of the aggregate variables, determines the coevolution of the frequency distribution of information‐updating strategies in the population of firms and the extent of the nominal adjustment of the general price level to a monetary shock. As it turns out, evolutionary learning dynamics take the information‐updating process to a long‐run equilibrium configuration in which, albeit either most or even all firms play the bounded rationality strategy, the general price level is the symmetric Nash equilibrium price and the monetary shocks have persistent, although not permanent, impacts on real output. (JEL E31, C73, D83)     

INFLATION DYNAMICS AND SUBJECTIVE EXPECTATIONS IN THE UNITED STATES

We estimate a forward‐looking New Keynesian Phillips Curve (NKPC) for the United States using data from the Survey of Professional Forecasters as proxy for expected inflation. We obtain significant and plausible estimates for the structural parameters independently of whether we use the output gap or unit labor costs as a measure of marginal costs. Moreover, when estimating a Phillips curve where lagged inflation enters due to price indexation by nonreoptimizing firms, we obtain significant parameter estimates of the sign predicted by theory independently of the marginal cost measure used. (JEL E31)     

SUPERSTITION IN THE HOUSING MARKET

We provide the first solid evidence that Chinese superstitious beliefs can have significant effects on house prices in a North American market with a large immigrant population. Using real estate data on close to 117,000 house sales, we find that houses with address number ending in “4” are sold at a 2.2% discount and those ending in “8” are sold at a 2.5% premium in comparison to houses with other addresses. These price effects are found either in neighborhoods with a higher than average percentage of Chinese residents, consistent with cultural preferences, or in repeated transactions, consistent with speculative behavior. (JEL D03, R2, Z1)     

OUTPUT EFFECTS OF INFLATION WITH FIXED PRICE– AND QUANTITY–ADJUSTMENT COSTS

This article examines how the aggregate production varies with inflation when there are fixed price– and quantity–adjustment costs. It shows that such variation is determined by the elasticity of the firms’ marginal real revenue with respect to demand. The aggregate production decreases with inflation if this elasticity always exceeds minus unity, whereas the aggregate production increases with inflation if the elasticity is always less than minus unity. The aggregate production is independent of inflation in the special case that the elasticity always equals minus unity. The latter occurs if demand is derived from a log‐quadratic utility function. (JEL E31)     

THE BIASES OF FEDERAL RESERVE BANK PRESIDENTS

This paper develops statistical tests which show that in Federal Open Market Committee voting, Federal Reserve bank presidents, as a group, prefer less expansionary monetary policy than Federal Reserve board members. Further tests show that a subset of Federal Reserve bank presidents vote in a manner which is consistent with the partisanship of the U.S. president during whose term they were appointed. Membership in this subset is highly correlated with a career as an economist. These results have implications for reforms which would alter the voting power of bank presidents on the FOMC.     

House Price Shocks and Individual Divorce Risk in the United States

Households in the United States hold a significant portion of their total wealth in owner-occupied housing. Thus, changes in housing prices may have an important impact on the marital surplus the household enjoys. What happens to marriages of homeowners when there is a shock to housing prices? This question was addressed using household data from the panel study of income dynamics (PSID) and a quarterly MSA level house price index from the Federal Housing Finance Agency, controlling for local labor market conditions. House price shocks were calculated as the cumulative sum of residuals of a second order autoregressive model from the previous four years. Results showed that positive house price shocks stabilized marriage for all couples. A one standard deviation increase in the house price shock decreased the risk of divorce in the following year by about 13–18%. The results were driven by the younger cohort of households in the PSID, those with lower educational attainment, and those with relatively low family income. The findings are discussed in the context of theories on changes in marital surplus, and changes in the transaction costs surrounding divorce.     

CAN MONETARY POLICY INFLUENCE LONG‐TERM INTEREST RATES? IT DEPENDS

Can monetary policy influence long‐term interest rates? Studies that have tackled this question using vector autoregressions (VARs) generally find that monetary policy's influence on long‐term interest rates is small and often statistically insignificant. Other studies, however, using a single‐equation approach, have found a robust relationship. Our study sheds new light on this question by estimating the effect of monetary policy shocks on long‐term interest rates in a VAR with long‐run monetary neutrality restrictions. We find that U.S. monetary policy can strongly influence long‐term interest rates, but only when the Federal Reserve has inflation‐fighting credibility and is able to firmly anchor inflationary expectations. (JEL E43, E51, E52)     

Perceived inflation and expected future prices in different currencies

Five experiments were conducted to investigate whether perceived inflation and expected future prices are influenced by the nominal representation of increases in product prices in different currencies. In contrast to previous research demonstrating overestimates of the perceived inflation of product prices after the transition of the domestic German Mark to Euro [Greitemeyer, T., Schultz-Hardt, S., Traut-Mattausch, E., & Frey, D. (2005). The influence of price trend expectations on price trend perceptions: Why the Euro seems to make life more expensive? Journal of Economic Psychology, 26, 541–548; Traut-Mattausch, E., Schultz-Hardt, S., Greitemeyer, T., & Frey, D. (2004). Expectancy confirmation in spite of disconfirming evidence: The case of price increases due to the introduction of the Euro. European Journal of Social Psychology, 34, 739–760], the price increases were of normal magnitude (5% and 8%) and a larger set of prices was used including small weekly expenses, prices of durables, and rent. All experiments were conducted in Sweden (not member of the European monetary union) employing undergraduates who volunteered to participate in class settings without any financial compensation. The price increases were expressed in the same currency, either actual currencies (Swedish Crowns or Euros) or fictitious currencies with different units. In general inflation was underestimated, to a larger extent when the currency or the product prices were unfamiliar than familiar. It was also shown that product-specific price changes made it difficult to perceive inflationary price increases. Only marginal effects of currency unit were observed.     

房价波动影响结婚决策的研究

中国房地产市场经历20多年发展,与人民生活形成了紧密联系,房价波动对青年的结婚决策产生影响。该文将房价纳入即将结婚男女的效用方程,并运用面板数据模型对我国2004—2008年31个省、自治区、直辖市的房价增长速度和初婚率进行分析,计量分析结果表明,在房价快速增长的近几年,房价增长速度提升1个百分点,初婚率下降约0．02个千分点,且我国初婚率对房价增长速度的变动敏感。我国房价的快速上涨确实对青年的结婚决策产生了明显压力。因此,政府适当控制房价。尤其是住宅性商品房价格的增长速度,这对于实现家庭稳定、社会和谐具有重要的现实意义。     

DO CAPITAL ADEQUACY REQUIREMENTS MATTER FOR MONETARY POLICY?

Central bankers and financial supervisors can have conflicting goals. While monetary policymakers work to ensure sufficient lending activities as a foundation for high and stable economic growth, supervisors may limit banks’ lending capacities in order to prevent excessive risk taking. We show that, in theory, central bankers can avoid this potential conflict by adopting an interest rate strategy that takes accounts of capital adequacy requirements. Empirical evidence suggests that while policymakers at the Federal Reserve have adjusted their interest rate to neutralizing the procyclical impact of bank capital requirements, those in Germany and Japan have not. (JEL E52, E58, G21)     

AN EXAMINATION OF LINEAR AND NONLINEAR CAUSAL RELATIONSHIPS BETWEEN COMMODITY PRICES AND U.S. INFLATION

This article uses both linear and nonlinear causality tests to examine the causal relationships between changes in commodity prices and U.S. inflation. Prior to the Great Moderation, there is evidence that changes in commodity price indices linearly lead inflation. The stability of the causal relationship appears to vary over time with a stronger bivariate link established before the Great Moderation. Further, there is evidence of significant nonlinear causality from raw industrials and metals indices to inflation with most of this detected nonlinear relationship being captured using the Baba, Engle, Kraft, and Kroner asymmetric generalized autoregressive conditional heteroskedasticity model. This implies that the observed nonlinear Granger causality is largely driven by unanticipated shocks and volatility spillovers in the run‐up of commodity prices in late 2000. (JEL C18, C22, E31)     

IS THE PRICE ELASTICITY OF MONEY DEMAND ALWAYS UNITY?

Including both monetary gold and nonmonetary gold in a standard money‐in‐utility model, we establish a presumption that the price elasticity of money demand should be less than 1 under commodity standards. Applying cointegration methods to data of the world, the United Kingdom, and the United States, we find support for the new theory. (JEL E41, E42)