Reviving Micro Real Rigidities: The Importance of Demand Shocks

We revisit the role of micro real rigidities as a driver of monetary non-neutrality, using a simple menu-cost model featuring non-constant elasticity of demand with both idiosyncratic productivity and demand shocks. The model is calibrated to match firm-level productivity and demand processes estimated from U.S. data. Despite its simplicity, the calibrated model overturns prior negative findings in the literature on micro real…

Housing Wealth and Consumption: The Role of Heterogeneous Credit Constraints

We quantify the role of heterogeneity in households’ financial constraints in explaining the link between the large decline in aggregate consumption and the decline in house values between 2006 and 2009 using individual-level data. Constraints that are triggered by a decline in house values, and a small fraction of consumers facing particularly severe constraints prior to the decline in house values explain 76% of the aggrega…

Identifying Monetary Policy Shocks: A Natural Language Approach

Forthcoming in American Economic Journal: Macroeconomics. We develop a novel method for the identification of monetary policy shocks. By applying natural language processing techniques to documents that Federal Reserve staff prepare in advance of policy decisions, we capture the Fed's information set. Using machine learning techniques, we then predict changes in the target inte…

Pricing Under Distress

We isolate the anticipation effect of uncertainty on firms' price-setting behavior using a quasi-natural experiment: the 2019 Social Uprising in Chile. During the 31-day period following the outbreak of nationwide protests and riots, the frequency of supermarket price changes fell by about half, while the average size of adjustments rose by about half. Suppliers' prices remaine…

Aggregate Implications of Micro Price Adjustment: An Estimated Menu Cost Model

From Aggregate Shocks to Micro Price Dynamics

Monetary Policy Transmission in Emerging Economies

Identifying Demand-Driven Inflation: Evidence from Pension Withdrawals in Chile

Monetary Policy Without Borrowing: Capacity Constraints and Lumpy Investment

Professional Forecasters and Markets: The Term Structure of Inflation Expectations

This chapter examines various measures of inflation expectations from surveys of professional forecasters and financial markets in the United States from 1998 to 2023. These measures span different horizons, forming a term structure of inflation expectations analogous to a yield curve.

The Long and Variable Lags of Monetary Policy: Evidence from Disaggregated Price Indices

We study how monetary policy affects subcomponents of the Personal Consumption Expenditures Price Index (PCEPI) using local projections. Following a monetary policy contraction, the response of aggregate PCEPI turns significantly negative after over three years. There are stark differences in the timing and magnitude of the responses across price categories, including some prices that show an initially positive response. We di…

SVARs With Occasionally-Binding Constraints

Published in Journal of Econometrics, December 2022, 231(2), 477-499 We develop a structural VAR in which an occasionally-binding constraint generates censoring of one of the dependent variables. Once the censoring mechanism is triggered, we allow some of the coefficients for the remaining variables to change. We show that a necessary condition for a unique reduced form is that…

Piecewise Linear Approximations and Filtering for DSGE Models with Occasionally-Binding Constraints

Published in Review of Economic Dynamics, July 2021, 41, 96-120. We develop an algorithm to construct approximate decision rules that are piecewise- linear and continuous for DSGE models with an occasionally binding constraint. The functional form of the decision rules allows us to derive a conditionally optimal particle filter (COPF) for the evaluation of the likelihood functi…

Institutions, Tax Evasion and Optimal Policy

Previously circulated under the title "Informal Sector, Government Policy and Institutions" Published in Journal of Monetary Economics , 2021, 118, 212-229. The mix of inflation and income taxation that governments adopt vary considerably across countries. We take a Ramsey optimal-policy approach to explain these differences, focusing on the institutions of the country, modeled…

Term Structures of Inflation Expectations and Real Interest Rates

Published in Journal of Economic Business and Statistics, 2020, 38(3), 542-553. I use a statistical model to combine various surveys to produce a term structure of inflation expectations — inflation expectations at any horizon — and an associated term structure of real interest rates. Inflation expectations extracted from this model track realized inflation quite well, and …

A Structural Model of Electoral Accountability

Published in International Economic Review , 2019, 60(2), 517-545. This paper proposes a structural approach to measuring the effects of electoral accountability. We estimate a political agency model with imperfect information in order to identify and quantify discipline and selection effects, using data on U.S. governors. We find that the possibility of reelection provides a s…

Macroeconomic Dynamics Near the ZLB: A Tale of Two Countries

Published in Review of Economic Studies, 2018, 85, 87-118. Previously circulated under the title "Macroeconomic Dynamics Near the ZLB: A Tale of Two Equilibria". We compute a sunspot equilibrium in an estimated small-scale New Keynesian model with a zero lower bound (ZLB) constraint on nominal interest rates and a full set of stochastic fundamental shocks. In this equilibrium a…

Assessing DSGE Model Nonlinearities

Published in Journal of Economic Dynamics and Control, 2017 , 83, 34-54. We develop a new class of time series models to identify nonlinearities in the data and to evaluate DSGE models. U.S. output growth and the federal funds rate display nonlinear conditional mean dynamics, while inflation and nominal wage growth feature conditional heteroskedasticity. We estimate a DSGE mode…

Homework in Monetary Economics: Inflation, Home Production and Production of Homes

Published in Review of Economic Dynamics , July 2016, 21, 105-124. We introduce household production and the production of houses (construction) into a monetary model. Theory predicts infl‡ation, as a tax on market activity, encourages substitution into household production and hence investment in housing. In the model, the stock and appropriately-de‡flated price of housing inc…

Improving GDP Measurement: A Measurement Error Perspective

Published in Journal of Econometrics, April 2016, 191(2), 384-397. We provide a new measure of historical U.S. GDP growth, obtained by applying optimal signal-extraction techniques to the noisy expenditure-side and income-side GDP estimates. The quarter-by-quarter values of our new measure often differ noticeably from those of the traditional measures. Its dynamic properties di…

Top Universities Have Top Economics Departments

"It is nearly impossible to be a top university without a first-rate economics department." Columbia University's president Lee Bollinger is reported to have said this in a news article chronicling the rise of the Economics Department at Columbia in the early 2000s. In this short note I seek to investigate if there is evidence for this claim. The results show that there is a la…

Inflation During and After the Zero Lower Bound

Prepared for the Jackson Hole Economic Policy Symposium titled Inflation Dynamics and Monetary Policy organized by the Federal Reserve Bank of Kansas City in Jackson Hole, WY, August 27-29, 2015. Published in the proceedings, 2016, 359-436. First Draft: June 2015 Paper Most Recent Working Paper [September 2015] Additional Materials Press Mention – Reuters Press Mention – Fran…

A Comparison of Programming Languages in Macroeconomics

Published in Journal of Economic Dynamics and Control, September 2015, 58, 265-273. We solve the stochastic neoclassical growth model, the workhorse of modern macroeconomics, using C++14, Fortran 2008, Java, Julia, Python, Matlab, Mathematica, and R. We implement the same algorithm, value function iteration, in each of the languages. We report the execution times of the codes i…

Improving GDP Measurement: A Forecast Combination Perspective

Published in Causality, Prediction, and Specification Analysis: Recent Advances and Future Directions: Essays in Honor of Halbert L. White Jr (X. Chen and N. Swanson eds.), 2013, Springer, 1-26. Two often-divergent U.S. GDP estimates are available, a widely-used expenditure-side version GDPE, and a much less widely-used income-side version GDPI . We propose and explore a "forec…

A Real Economic Activity Indicator for Turkey

Published in Central Bank Review , January 2013, 13, 15-29 This paper presents a monthly indicator of real economic activity for historical accounting and real-time monitoring of business cycles in Turkey. Business conditions, an unobserved component implied by the interaction and co-movement of various macroeconomic variables, are related to a number of observables at multiple…

Money, Search and Business Cycles

Published in International Economic Review, August 2011, 52(3), 935-959. Monetary models that specify explicit frictions to generate money demand have been developed over the last 20 years and have been used to address many questions. In this article, I investigate the short-run properties of a particular model considering a number of versions based on some modeling choices. Al…

Money and Capital

Published in Journal of Monetary Economics, March 2011, 58, 98-116 Also circulated as "Money and Capital: A Quantitative Analysis". The effects of money (anticipated inflation) on capital formation is a classic issue in macroeconomics. Previous papers adopt reduced-form approaches, putting money in the utility function, or imposing cash in advance, but using otherwise frictionl…

Sticky Prices versus Monetary Frictions: An Estimation of Policy Trade-offs

Also circulated as "Insights from an Estimated Search Model of Money with Nominal Rigidities". Published in American Economic Journal: Macroeconomics , January 2011, 3, 60-90. We develop a two-sector monetary model with a centralized and decentralized market. Activities in the centralized market resemble those in a standard New Keynesian economy with price rigidities. In the de…

Globalization, the Business Cycle, and Macroeconomic Monitoring

Published in NBER International Seminar on Macroeconomics 2010, 2011, 245-286 We propose and implement a framework for characterizing and monitoring the global business cycle. Our framework utilizes high-frequency data, allows us to account for a potentially large amount of missing observations, and is designed to facilitate the updating of global activity estimates as data are…

Optimal Fiscal and Monetary Policy when Money is Essential

Published in Journal of Economic Theory, September 2010, 145(5), 1618-1647. Contains parts of the now-defunct working paper titled "Money and Optimal Capital Taxation". We study optimal fiscal and monetary policy in an environment where explicit frictions give rise to valued money, making money essential in the sense that it expands the set of feasible trades. The two main resu…

Real-Time Macroeconomic Monitoring: Real Activity, Inflation, and Interactions

Prepared for the American Economic Association 2010 Annual Meeting Session "Revisiting and Rethinking the Business Cycle". Published in American Economic Review Papers and Proceedings, May 2010, 100(2), 20-24 We sketch a framework for monitoring macroeconomic activity in real-time and push it in new directions. In particular, we focus not only on real activity, which has receiv…

An Estimated Search-Based Monetary DSGE Model with Liquid Capital

We have no current plans of revising or publishing this paper. It is meant to be an extension of Aruoba and Schorfheide (2011) . In this note we extend the search-based monetary DSGE model studied in Aruoba and Schorfheide (2010) and introduce liquid capital claims. More specifically, buyers in the decentralized market can use a fraction of their capital stock holdings in addit…

Real-Time Measurement of Business Conditions

Published in Journal of Business and Economic Statistics, 2009, 27(4), 417-427 (lead article). We construct a framework for measuring economic activity at high frequency, potentially in real time. We use a variety of stock and flow data observed at mixed frequencies (including very high frequencies), and we use a dynamic factor model that permits exact filtering. We illustrate …

Data Revisions are not Well-Behaved

Published in Journal of Money, Credit and Banking , March/April 2008, 40(2-3), 319-340. We document the empirical properties of revisions to major macroeconomic variables in the United States. Our findings suggest that they do not satisfy simple desirable statistical properties. In particular, we find that these revisions do not have a zero mean, which indicates that the initia…

Bargaining and the Value of Money

Published in Journal of Monetary Economics , November 2007, 54, 2636-2655. Search models of monetary exchange have typically relied on Nash (1950) bargaining, or strategic games that yield an equivalent outcome, to determine the terms of trade. By considering alternative axiomatic bargaining solutions in a simple search model with divisible money, we show that the properties of…

Comparing Solution Methods for Dynamic Equilibrium Economies

Published in Journal of Economic Dynamics and Control , December 2006, 30(12), 2477-2508. This paper compares solution methods for dynamic equilibrium economies. We compute and simulate the stochastic neoclassical growth model with leisure choice using first, second, and fifth order perturbations in levels and in logs, the finite elements method, Chebyshev polynomials, and valu…

The Macroeconomy and the Yield Curve: A Dynamic Latent Factor Approach

Published in Journal of Econometrics , March-April 2006, 131(1-2), 309-338. We estimate a model that summarizes the yield curve using latent factors (specifically, level, slope, and curvature) and also includes observable macroeconomic variables (specifically, real activity, inflation, and the monetary policy instrument). Our goal is to provide a characterization of the dynamic…

Moving Holidays and Seasonal Adjustment: The Case of Turkey

Published in Review of Middle East Economics and Finance, December 2004, Vol. 2 : No 3, Article 3. When holiday variation is present so that the dates of certain holidays change from year to year, the relatively automatic seasonal adjustment procedures may fail to extract the seasonal component from a series since the holiday effects are not confined to that component. Turkey, …

Search, Money and Capital: A Neoclassical Dichotomy

Published in Journal of Money Credit and Banking , December 2003, 35(6), 1085-1105. Recent work has reduced the gap between search-based monetary theory and mainstream macroeconomics by incorporating into the search model some centralized markets as well as some decentralized markets where money is essential. This paper takes a further step toward this integration by introducin…

Book Review of 'Time Series Analysis by State Space Methods'

Published in Journal of American Statistical Association , 98(461), March 2003. Paper Most Recent Working Paper (may not be identical to the published version) Published Version (requires subscription)

Deseasonalizing Turkish Macroeconomic Data: A Caveat to Applied Researchers in Turkey

Published in Istanbul Stock Exchange Review , Volume: 5(18), April/May/June 2001, pp. 33-52. This paper analyzes the effects of regular seasonal fluctuations of macroeconomic variables in Turkey due to the religious events (religious holidays and Ramadan)[1] in monthly frequency. Conventional deterministic deseasonalization techniques are applied to the detrended and linearized…