Abstract:We estimate a Heterogeneous-Agent New Keynesian model that matches existing microeconomic evidence on marginal propensities to consume and macroeconomic evidence on the impulse response to a monetary policy shock. We rule out habit formation as an explanation for the hump shape of output, but show that sticky information in the sense of Mankiw and Reis (2002) can rationalize both the micro and the macro data. Our estimated model implies a central role for investment in the monetary transmission mechanism.
“…As Equation (9) shows, this parameter directly dictates the slope of the Phillips curve. A slope of 0.1 is the same as in Kaplan, Moll, and Violante (2018) and falls within the range of estimates in the literature such as in Smets and Wouters (2007); Christiano, Eichenbaum, and Trabandt (2016); Auclert, Rognlie, and Straub (2020).…”
We develop a heterogeneous-agent New Keynesian model featuring a frictional labor market with on-the-job search to quantitatively study the role of worker flows in inflation dynamics and monetary policy. Motivated by our empirical finding that the historical negative correlation between the unemployment rate and the employer-to-employer (EE) transition rate up to the Great Recession disappeared during the recovery, we use the model to quantify the effect of EE transitions on inflation in this period. We find that the four-quarter inflation rate would have been 0.6 percentage points higher between 2016 and 2019 if the EE rate increased commensurately with the decline in unemployment. We then decompose the channels through which a change in EE transitions affects inflation. We show that an increase in the EE rate leads to an increase in the real marginal cost, but the direct effect is partially mitigated by the equilibrium decline in market tightness through aggregate demand that exerts downward pressure on the marginal cost. Finally, we study the normative implications of job mobility for monetary policy responding to inflation and labor market variables according to a Taylor rule, and find that the welfare cost of ignoring the EE rate in setting the nominal interest rate is 0.2 percent in additional lifetime consumption.
“…As Equation (9) shows, this parameter directly dictates the slope of the Phillips curve. A slope of 0.1 is the same as in Kaplan, Moll, and Violante (2018) and falls within the range of estimates in the literature such as in Smets and Wouters (2007); Christiano, Eichenbaum, and Trabandt (2016); Auclert, Rognlie, and Straub (2020).…”
We develop a heterogeneous-agent New Keynesian model featuring a frictional labor market with on-the-job search to quantitatively study the role of worker flows in inflation dynamics and monetary policy. Motivated by our empirical finding that the historical negative correlation between the unemployment rate and the employer-to-employer (EE) transition rate up to the Great Recession disappeared during the recovery, we use the model to quantify the effect of EE transitions on inflation in this period. We find that the four-quarter inflation rate would have been 0.6 percentage points higher between 2016 and 2019 if the EE rate increased commensurately with the decline in unemployment. We then decompose the channels through which a change in EE transitions affects inflation. We show that an increase in the EE rate leads to an increase in the real marginal cost, but the direct effect is partially mitigated by the equilibrium decline in market tightness through aggregate demand that exerts downward pressure on the marginal cost. Finally, we study the normative implications of job mobility for monetary policy responding to inflation and labor market variables according to a Taylor rule, and find that the welfare cost of ignoring the EE rate in setting the nominal interest rate is 0.2 percent in additional lifetime consumption.
“…This paper is complementary to recent innovations in understanding heterogeneous consumer responses to monetary policy and their implications for macroeconomic outcomes (Kaplan, Moll, andViolante (2018), McKay, Nakamura, andSteinsson (2016), Auclert, Rognlie, and Straub (2020)) and financial asset prices (Drechsler, Savov, and Schnabl (2018), Kekre and Lenel (2020)). We keep the representative agent assumption, but instead assume finance habit formation.…”
“…The evolution of the recursive means across the 150,000 non‐discarded draws, as well as the estimated posterior distributions, suggest good convergence properties when we only estimate shocks, but less stability when estimating both shocks and parameters. This could be due to the fact that the model is not designed explicitly to fit the hump shapes in the time series; see Auclert, Rognlie, and Straub (2020) for a model that addresses this shortcoming.…”
Section: Application To Estimationmentioning
confidence: 99%
“… In the literature, Winberry (2018), Auclert, Rognlie, and Straub (2020), and Bayer, Born, and Luetticke (2020) all calibrated the steady‐state micro parameters governing the heterogeneous‐agent problem, and used time‐series data only to estimate macro parameters, as we do here. In recent work, Acharya, Cai, Del Negro, Dogra, Matlin, and Sarfati (2020) used time‐series data to also estimate micro parameters, with sequential Monte Carlo methods to speed up estimation.…”
We propose a general and highly efficient method for solving and estimating general equilibrium heterogeneous‐agent models with aggregate shocks in discrete time. Our approach relies on the rapid computation of
sequence‐space Jacobians—the derivatives of perfect‐foresight equilibrium mappings between aggregate sequences around the steady state. Our main contribution is a fast algorithm for calculating Jacobians for a large class of heterogeneous‐agent problems. We combine this algorithm with a systematic approach to composing and inverting Jacobians to solve for general equilibrium impulse responses. We obtain a rapid procedure for likelihood‐based estimation and computation of nonlinear perfect‐foresight transitions. We apply our methods to three canonical heterogeneous‐agent models: a neoclassical model, a New Keynesian model with one asset, and a New Keynesian model with two assets.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.