Monetary Neutrality with Sticky Prices and Free Entry

2020 ◽  
pp. 1-42
Author(s):  
Florin O. Bilbiie
Keyword(s):  
Price Index ◽  
Aggregate Demand ◽  
Product Variety ◽  
Sunk Costs ◽  
Free Entry ◽  
Wage Stickiness ◽  
Fixed Prices ◽  
Monetary Neutrality ◽  
Price Flexibility ◽  
Intensive Quantity

Monetary policy is neutral even with fixed prices if free entry determines product variety optimally, as in Dixit and Stiglitz (1977). Entry substitutes for price flexibility in the welfare-based price index when individual prices are sticky. In response to aggregate demand expansions, the intensive (quantity produced of each good) and extensive (number of goods being produced) margins move in offsetting ways, leaving aggregate production unchanged. Price stickiness thus generates deviations from monetary neutrality only in conjunction with entry frictions: when variety is not optimally determined (preferences are not Dixit-Stiglitz), or when entry is subject to sunk costs and lags. Wage stickiness, instead, implies non-neutrality even in the frictionless-entry benchmark.

scholarly journals Empirical analysis of the determinants of the IPCA for the period of 2000 to 2011: an approach based on a SVAR model

2017 ◽  
Vol 31 (2) ◽  
Author(s):  
Mateus Boldrine Abrita ◽  
Eliane Cristina De Araújo ◽  
Angelo Rondina Neto
Keyword(s):  
Exchange Rate ◽  
Empirical Analysis ◽  
Autoregressive Model ◽  
Price Index ◽  
Aggregate Demand ◽  
Consumer Price Index ◽  
External Factors ◽  
Level Of Activity ◽  
Svar Model

This study examines empirically the determinants of the Brazilian inflation, measured by the Broad Consumer Price Index (IPCA) and its decomposition, estimating two equations and using an autoregressive model. The database covers the period from January 2000 to December 2011. Five main groups are mentioned as the determinants of inflation: i) Aggregate Demand; ii) Aggregate Supply; iii) Exchange Rate; iv) Salaries and v) Inertia. The evidences reveals that inertia, external factors and the supply conditions overlap the demand in the determination of the Brazilian inflation. Thus, inflation shows to be little sensitive to the level of activity. 

scholarly journals The Aggregate Implications of Regional Business Cycles

Econometrica ◽  
2019 ◽  
Vol 87 (6) ◽  
pp. 1789-1833 ◽  
Author(s):  
Martin Beraja ◽  
Erik Hurst ◽  
Juan Ospina
Keyword(s):  
Business Cycles ◽  
Great Recession ◽  
Aggregate Demand ◽  
Strong Relationship ◽  
Aggregate Data ◽  
New Keynesian ◽  
Aggregate Fluctuations ◽  
Wage Dynamics ◽  
The Great Recession ◽  
Wage Stickiness

Making inferences about aggregate business cycles from regional variation alone is difficult because of economic channels and shocks that differ between regional and aggregate economies. However, we argue that regional business cycles contain valuable information that can help discipline models of aggregate fluctuations. We begin by documenting a strong relationship across U.S. states between local employment and wage growth during the Great Recession. This relationship is much weaker in U.S. aggregates. Then, we present a methodology that combines such regional and aggregate data in order to estimate a medium‐scale New Keynesian DSGE model. We find that aggregate demand shocks were important drivers of aggregate employment during the Great Recession, but the wage stickiness necessary for them to account for the slow employment recovery and the modest fall in aggregate wages is inconsistent with the flexibility of wages we observe across U.S. states. Finally, we show that our methodology yields different conclusions about the causes of aggregate employment and wage dynamics between 2007 and 2014 than either estimating our model with aggregate data alone or performing back‐of‐the‐envelope calculations that directly extrapolate from well‐identified regional elasticities.

scholarly journals An artificial Wicksell–Keynes economy integrating short-run business cycle and long-term cumulative trend

2020 ◽  
Vol 15 (4) ◽  
pp. 953-998 ◽  
Author(s):  
Ichiro Takahashi ◽  
Isamu Okada
Keyword(s):  
Banking Sector ◽  
Full Employment ◽  
Aggregate Demand ◽  
Real Wages ◽  
Fractional Reserve Banking ◽  
Investment Funds ◽  
Wage Stickiness ◽  
Long Run ◽  
Short Run ◽  
Reserve Banking

Abstract Economists have investigated how price–wage rigidity influences macroeconomic stability. A widely accepted view asserts that increased rigidity destabilizes an economy by requiring a larger quantity adjustment. In contrast, the Old Keynesian view regards nominal rigidity as a stabilizing factor, because it reduces fluctuations in income and thus aggregate demand. To examine whether price–wage stickiness is stabilizing or destabilizing, we build an agent-based Wicksell–Keynes macroeconomic model, which is completely closed and absolutely free from any external shocks, including policy interventions. In the model, firms setting prices and wages make both employment and investment decisions under demand constraints, while a fractional-reserve banking sector sets the interest rate and provides the firms with investment funds. As investment involves a gestation period, it is conducive to overproduction, thereby causing alternate seller’s and buyer’s markets. In the baseline simulation, a stable economy emerges with short-run business cycles and long-run fluctuations. One unique feature of the economy is its remarkable resilience: When afflicted by persistent deflation, it often manages to reverse the deflationary spiral and get back on a growth track, ultimately achieving full or nearly full employment. The virtual experiments demonstrate that prices and wages must both be moderately rigid to ensure long-run stability. The key stabilizing mechanism is a recurring demand-sufficient economy, in which firms are allowed to increase employment while simultaneously cutting real wages.

UNSECURED CREDIT, PRODUCT VARIETY, AND UNEMPLOYMENT DYNAMICS

2020 ◽  
pp. 1-37
Author(s):  
Mario Rafael Silva
Keyword(s):  
Great Recession ◽  
Product Variety ◽  
Free Entry ◽  
Financial Shocks ◽  
Productivity Shocks ◽  
The Great Recession ◽  
Borrowing Constraint ◽  
Short Run ◽  
Prime Determinant ◽  
Revolving Credit

Revolving credit is the prime determinant of short-run household liquidity and comoves positively with product variety and negatively with unemployment. I develop a theory of feedback between revolving credit and product development and examine its ability to explain labor market volatility. Extending the Mortensen–Pissarides model with an endogenous borrowing constraint and free entry of monopolistically competitive firms reproduces stylized facts in the data and amplifies both productivity and financial shocks through mutual causality. Higher debt limits encourage firm entry and raise product variety (the entry channel), and greater variety makes default more costly and thereby raises the equilibrium debt level (the consumption value channel). Though productivity shocks are sufficient to generate higher volatility, financial shocks are essential in approximating the time series patterns of unemployment, vacancies, and revolving credit in the data, and reproduce the rise in unemployment during the Great Recession.

Taylor rule and monetary policy transmission mechanism in a new keynesian economy

2018 ◽  
Vol 14 (27) ◽  
pp. 24
Author(s):  
Christopher Cernichiaro Reyna
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Interest Rate ◽  
Price Index ◽  
Aggregate Demand ◽  
Transmission Mechanism ◽  
New Keynesian ◽  
Keynesian Model ◽  
Policy Transmission ◽  
Monetary Policy Transmission Mechanism

This paper estimates two SVAR models to assess Mexican Monetary policy rate for the period 2000-2015, which are recursively identifid according to Gali and Monacelli (2005) model. This paper shows that monetary policy rate responds to GDP, infltion and exchange rate as Taylor’s Rule predicts. When controlling for General Consumer’s Price Index infltion, monetary policy barely affcts aggregate demand even if exchange rate appreciates, nevertheless GDP diminish after contractive monetary policy takes place. Infltion rate lightly increases after interest rate rises, which does not coincide with New Keynesian predictions. A second model is estimated controlling for underlying infltion. Its results exhibit more interest rate sensitive consumption and net exports, while real exchange rate and GDP change as New Keynesian model predicts. Infltion decreases after monetary policy rise but its flctuations are close to zero. According to Gali (2008) such small changes indicate nominal rigidities existence.

scholarly journals Evolution of Consumption Expenditures of Population of the Republic of Moldova

2020 ◽  
Author(s):  
Mircea Gutium ◽  
Keyword(s):  
Price Index ◽  
Aggregate Demand ◽  
Consumer Price Index ◽  
Positive Influence ◽  
Purchasing Power ◽  
The European Union ◽  
Consumer Spending ◽  
Consumption Expenditures ◽  
Republic Of Moldova ◽  
The Republic

Consumption expenditures is one of the key indicators that reflects the purchasing power of the population. Purchasing power in turn shows the level of social welfare. The population with a stable evolution of consumer spending is at least able to maintain its level of consumption with inflation. In addition, if consumer spending rises in proportion to the level of inflation, there is an increase in welfare and living standards. High level of consumption has positive influence on business. greater aggregate demand will generate more profits, boost company development, and foster job creation. In this study, the affirmation was verified that the consumer price index is one of the factors that influence the standard of living, but not primarily. The following scientific methods were used to approve or reject the statement: scientific abstraction, analysis and synthesis, graphical and tabular method, comparative analysis method, correlation and regression analysis. In this study there was made comparison of consumption evolution and its structure in the Republic of Moldova and in the European Union to identify the difference in welfare. The linear regression model between the consumer price index and growth rate of household expenditures was elaborated.

Vicarious entrapment: Your sunk costs, my escalation of commitment

2011 ◽  
Author(s):  
Brian C. Gunia ◽  
Niro Sivanathan ◽  
Adam Galinsky
Keyword(s):  
Sunk Costs ◽  
Escalation Of Commitment

ANALISIS PENGARUH INFLASI, KURS DAN IHSG TERHADAP RETURN REKSA DANA SAHAM PT NIKKO SECURITIES INDONESIA PERIODE 2014-2017

2019 ◽  
Vol 2 (2) ◽  
pp. 103
Author(s):  
Muhammad Rois Rois ◽  
Manarotul Fatati Fatati ◽  
Winda Ihda Magfiroh
Keyword(s):  
Regression Analysis ◽  
Exchange Rate ◽  
Linear Regression ◽  
Multiple Linear Regression ◽  
Stock Price ◽  
Price Index ◽  
Linear Regression Analysis ◽  
Multiple Linear Regression Analysis ◽  
Equity Fund ◽  
Stock Price Index

This study aims to determine the effect of Inflation, Exchange Rate and Composite Stock Price Index (IHSG) to Return of PT Nikko Securities Indonesia Stock Fund period 2014-2017. The study used secondary data obtained through documentation in the form of PT Nikko Securities Indonesia Monthly Net Asset (NAB) report. Data analysis is used with quantitative analysis, multiple linear regression analysis using eviews 9. Population and sample in this research are PT Nikko Securities Indonesia. The result of multiple linear regression analysis was the coefficient of determination (R2) showed the result of 0.123819 or 12%. This means that the Inflation, Exchange Rate and Composite Stock Price Index (IHSG) variables can influence the return of PT Nikko Securities Indonesia's equity fund of 12% and 88% is influenced by other variables. Based on the result of the research, the variables of inflation and exchange rate have a negative and significant effect toward the return of PT Nikko Securities Indonesia's equity fund. While the variable of Composite Stock Price Index (IHSG) has a negative but not significant effect toward Return of Equity Fund of PT Nikko Securities Indonesia

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