Working Papers
Dynamic Pricing under Information Frictions: Evidence from Firm-level Subjective Expectations, with J. Tielens (Job Market Paper)
This paper provides novel theory and evidence on the dynamic pricing behavior of firms, their process of belief formation, and the aggregate implications for monetary non-neutrality. We combine almost three decades of monthly microdata on prices, costs, and survey expectations for the Belgian manufacturing sector to quantify the roles of nominal, real, and information frictions in accounting for the incompleteness of the pass-through of cost shocks into prices. We find that the three rigidities are all quantitatively important, and in particular that firms exhibit a high average monthly discounting of about 0.8 attributable to the information friction. We further show that the discounting is state-dependent, just below one when firms are hit by large shocks and lower in normal times, consistent with a model in which firms update their beliefs faster in response to large disturbances. At the aggregate level, these findings imply a non-linear Phillips curve and a central role for heterogeneity across industries via the elasticity of inflation to aggregate shocks. Because the state-dependent information friction operates as an amplification mechanism of cost shocks, the model can explain a larger share of inflation volatility than the full-information benchmark, suggesting a quantitatively relevant channel by which incomplete information increases the neutrality of money.
Micro and Macro Cost-price Dynamics in Normal Times and Inflation Surges, with M. Gertler, S. Lenzu, J. Tielens
We study cost-price dynamics in normal times and during inflation surges. Using microdata on firms’ prices and production costs we construct an empirical measure of price gaps—the deviation between a firm’s listed and optimal price. We then examine the mapping between gaps and price changes in the cross-section of firms and derive implications for inflation dynamics in the time-series. In the microdata, pricing policies display state-dependence: firms are more likely to adjust prices as their price gap widens, a mechanism that becomes quantitatively significant when large aggregate cost shocks occur. In normal times, adjustment probabilities are approximately constant and the microdata conform with the predictions of time-dependent models (e.g., Calvo 1983). Conditional on a path of aggregate cost shocks extracted from the data, we show that a generalized state-dependent pricing model accounts well for the pre-pandemic era’s low and stable inflation and the nonlinear surge observed during the pandemic.
Anatomy of the Phillips Curve: Micro Evidence and Macro Implications, with M. Gertler, S. Lenzu, J. Tielens
Conditionally accepted, American Economic Review
We develop a bottom-up approach to estimating the slope of the primitive form of the New Keynesian Phillips curve, which features marginal cost as the relevant real activity variable. Using quarterly micro data on prices, costs, and output from the Belgian manufacturing sector, we estimate dynamic pass-through regressions that identify the degrees of nominal and real rigidities in price setting. Our estimates imply a high slope for the marginal cost-based Phillips curve, which contrasts with the low estimates of the conventional unemployment or output-based formulations in the literature. We reconcile the difference by demonstrating that, although the pass-through of marginal cost into inflation is substantial, the elasticity of marginal cost with respect to the output gap is low, at least for pre-pandemic data. We also illustrate the advantage of a marginal cost-based Phillips curve for characterizing the transmission of supply shocks to inflation.
Oil Prices, Monetary Policy and Inflation Surges, with M. Gertler
R&R American Economic Journal: Macroeconomics
We develop a simple quantitative New Keynesian model aimed at analyzing how the reaction of monetary policy contributed to the recent rise and fall in inflation. The model includes several shocks but features oil price shocks for two reasons: (i) energy prices have been among the central factors in discussions about the surge; (ii) we can use identified oil shocks along with monetary shocks to estimate and discipline the model. We then employ the estimated framework to recover shocks without targeting inflation. Overall the model accounts for roughly three fourths of the surge in PCE inflation. Both the oil shocks and the shocks to policy accommodation played important roles in the inflation rise. Moreover, the easing of oil prices and subsequent shift to policy tightening contributed to the decline. A nonmonetary demand shock (a composite of private demand and fiscal stimulus) also contributed to inflation starting in 2022.
Liquidity and Fundamental Risks in a Search Economy
This paper studies the interplay between liquidity and fundamental risks in an asset pricing framework with a frictional, decentralized secondary market and endogenous trading decisions. In this setting, the liquidity value of assets decreases in the riskiness of the underlying. For a sufficiently large deterioration of fundamentals, agents stop trading the asset, leading to a freeze of the secondary market and flight-to-safety behavior. This mechanism implies a novel type of monetary “safe-trade” equilibrium, in which assets are traded if and only if safe. Liquidity feeds back into the default decision of the issuing firm, potentially leading to price spirals and a multiplicity of equity valuations and default thresholds.
Monetary Policy and Sovereign Risk, with L. Braccini
This paper estimates the effects of monetary policy on sovereign risk. We use proprietary intraday credit default swap (CDS) data on five European countries and identify the effects of monetary policy on CDS premia in a small time window around the European Central Bank (ECB) monetary policy announcements. We construct monetary policy surprises for the press release and conference windows separately and show that there are two channels with effects of opposite sign. We then use stock price surprises to disentangle and interpret the two effects in terms of a standard monetary policy channel, in which CDS premia and interest rates co-move positively, and an information channel, in which they co-move negatively. We find that the information channel is quantitatively the most important. The results are robust across samples, maturities of CDS, and model specifications.
A benevolent planner chooses optimally whether and how to disclose publicly a private forecast of fundamentals to a large number of informed small agents. These agents interact in economic environments with information frictions, strategic complementarity or substitutability in actions, and a rich set of externalities that are responsible for inefficient fundamental and non-fundamental fluctuations. First, I characterize the optimal policy as a function of the externalities of the economy, the quality of the forecast of the planner, and agents’ prior uncertainty. Next, I discuss and interpret the theoretical results within the context of an application to central bank communication.
Work in progress
Granular Identification of Vector Autoregression Models, with H. Han, and Y. Selvakumar.
A Closed-form Solution of Menu Cost Pricing Models for Monetary Policy Analysis, with A. Esbim, M. Gertler, S. Lenzu, and J. Tielens.