Confidence and the Propagation of Demand Shocks

We revisit the question of why shifts in aggregate demand drive business cycles. Our theory combines intertemporal substitution in production with rational confusion, or bounded rationality, in consumption and investment. The first element allows aggregate supply to respond to shifts in aggregate demand without nominal rigidity. The second introduces a “confidence multiplier,” that is, a positive feedback loop between real economic activity, consumer expectations of permanent income, and investor expectations of returns. This mechanism amplifies the business-cycle fluctuations triggered by demand shocks (but not necessarily those triggered by supply shocks); it helps investment to comove with consumption; and it allows front-loaded fiscal stimuli to crowd in private spending.

On the Basic Preconditions of Non-Neutrality of Money in Economic Theory

Based on the experimental calculations carried out with the help of the shifting mode reproduction model, as well as on the theoretical studies of Marx, Schumpeter, Keynes and his followers - representatives of the post-Keynesian direction, two conclusions were made in the article. First, that non-neutrality of money takes place in both short- and long-term periods, and second, that each of these periods has its own basic preconditions for non-neutrality. For the short term, it is a "phenomenon of nominal rigidity", and for the long term, it is a "phenomenon of capitalization of money". The thesis is justified that the "phenomenon of nominal rigidity" manifests itself mainly within the framework of the existing production, when the economic growth caused by the increase in money supply is achieved by increasing capacity utilization and engagement of idle labor. Accordingly, the "phenomenon of capitalization of money" manifests itself through the conversion of issued money into investments in fixed capital and, through the growth of this capital (and capacities), affects the GDP growth. It is shown that behind the two considered basic prerequisites there are fundamentally different theoretical approaches. Behind the short-term "phenomenon of nominal rigidity" there is an orthodox vision of economy focused on the equilibrium pricing mechanism. Behind the long-term "phenomenon of capitalization of money" there is a heterodox vision related to the mechanism of money circulation, emission and economic growth caused by it. It has been concluded that in case of probable increase of competition between these theoretical approaches it is unacceptable if short-term basic preconditions of non-neutrality of money are used in the analysis of long-term processes and long-term preconditions are used in the analysis of short-term growth cases.

Learning from House Prices: Amplification and Business Fluctuations

We formalize the idea that house price changes may drive rational waves of optimism and pessimism in the economy. In our model, a house price increase caused by aggregate disturbances may be misinterpreted as a sign of higher local permanent income, leading households to demand more consumption and housing. Higher demand reinforces the initial price increase in an amplification loop that drives comovement in output, labor, residential investment, land prices, and house prices even in response to aggregate supply shocks. The qualitative implications of our otherwise frictionless model are consistent with observed business cycles and it can explain the economic impact of apparently autonomous changes in sentiment without resorting to non-fundamental shocks or nominal rigidity.

Discrete Prices and the Incidence and Efficiency of Excise Taxes

This paper uses UPC-level data to examine the relationship between excise taxes, retail prices, and consumer welfare in the distilled spirits market. We document a nominal rigidity in retail prices that arises because firms largely choose prices that end in 99 cents and change prices in whole-dollar increments. A correctly specified model, like an ordered logit, takes this discreteness into account when predicting the effects of alternative taxes. Explicitly accounting for price points substantially impacts estimates of tax incidence and the excess burden cost of tax revenue. Meaningful nonmonotonicities in these quantities expand the potential considerations in setting excise taxes. (JEL H22, H71, L11, L66)

Business-Cycle Anatomy

We propose a new strategy for dissecting the macroeconomic time series, provide a template for the business-cycle propagation mechanism that best describes the data, and use its properties to appraise models of both the parsimonious and the medium-scale variety. Our findings support the existence of a main business-cycle driver but rule out the following candidates for this role: technology or other shocks that map to TFP movements; news about future productivity; and inflationary demand shocks of the textbook type. Models aimed at accommodating demand-driven cycles without a strict reliance on nominal rigidity appear promising. (JEL C22, E10, E32)

Paralyzed by Fear: Rigid and Discrete Pricing Under Demand Uncertainty

We propose a new theory of price rigidity based on firms' Knightian uncertainty about their competitive environment. This uncertainty has two key implications. First, firms learn about the shape of their demand function from past observations of quantities sold. This learning gives rise to kinks in the expected profit function at previously observed prices, making those prices both sticky and more likely to reoccur. Second, uncertainty about the relationship between aggregate and industry‐level inflation generates nominal rigidity. We prove the main insights analytically and quantify the effects of our mechanism. Our estimated quantitative model is consistent with a wide range of micro‐level pricing facts that are typically challenging to match jointly. It also implies significantly more persistent monetary non‐neutrality than in standard models, allowing it to generate large real effects from nominal shocks.

Real Rigidity, Nominal Rigidity, and the Social Value of Information

Does welfare improve when firms are better informed about the state of the economy and can thus better coordinate their production and pricing decisions? We address this question in an elementary business-cycle model that highlights how the dispersion of information can impede both kinds of decisions and, in this sense, be the source of both real and nominal rigidity. Within this context we develop a taxonomy for how the social value of information depends on the two rigidities, on the sources of the business cycle, and on the conduct of monetary policy. (JEL D21, D82, D83, E32, E52)

A NOTE ON INCREASING HAZARD FUNCTIONS AND THE MONETARY TRANSMISSION MECHANISM

This note studies the implications of the price reset hazard function for the monetary transmission mechanism of sticky price models. I first document some general analytical results that highlight the central role of the price (accumulative) distribution in linking the hazard function and the impulse response function. I find that nominal rigidity underlying increasing hazard functions is more successful than real rigidity in replicating realistic macro persistence. In addition, numerical simulations show that the interaction between the increasing hazard function and the real rigidity provides a powerful propagation mechanism for monetary shocks.