Welfare Costs of Inflation in a Menu Cost Model

Burstein, Ariel; Hellwig, Christian

doi:10.1257/aer.98.2.438

Cited by 71 publications

(68 citation statements)

References 11 publications

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“…In particular, we adopted a Calvo pricing scheme that yields a simple and transparent approximation of the utility of the representative agent. The main shortcoming of this choice is that the selection e¤ect that would be present in a menu cost version of this model might also mute the welfare costs of nominal distortions (Golosov and Lucas, 2007;Burstein and Hellwig, 2008;. However, we have no particular reason to believe that the selection e¤ect would change the relative performance of the targeting rules that we consider in our welfare analysis.…”

Section: Discussionmentioning

confidence: 99%

CONDI: A Cost-of-Nominal-Distortions Index

Eusepi

Hobijn

Tambalotti

2011

American Economic Journal: Macroeconomics

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We construct a price index with weights on the prices of di¤erent PCE goods chosen to minimize the welfare costs of nominal distortions: a cost-of-nominal-distortions index (CONDI). We compute these weights in a multi-sector New-Keynesian model with time-dependent price setting, calibrated using U.S. data on the dispersion of price stickiness and labor shares across sectors. We …nd that the CONDI weights mostly depend on price stickiness and are less a¤ected by the dispersion in labor shares. Moreover, CONDI stabilization leads to negligible welfare losses compared to the optimal policy and is better approximated by core rather than headline in ‡ation targeting. An even better approximation of the CONDI can be obtained with an adjusted core index that covers total expenditures excluding autos, clothing, energy, and food at home, but that includes food away from home.

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Section: Discussionmentioning

confidence: 99%

CONDI: A Cost-of-Nominal-Distortions Index

Eusepi

Hobijn

Tambalotti

2011

American Economic Journal: Macroeconomics

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“…a "menu cost" model (see also Burstein and Hellwig 2008 for a similar exercise without ZLB, which leads to negative optimal inflation rate). As a matter of fact, Nakamura et al (2016) argue that the presence of state-dependent pricing limits considerably the positive relationship between inflation and price dispersion, thus limiting the costs of inflation.…”

Section: Related Literaturementioning

confidence: 99%

The Optimal Inflation Target and the Natural Rate of Interest

Andrade¹,

Galı́²,

Bihan³

et al. 2018

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We study how changes in the value of the steady-state real interest rate affect the optimal inflation target, both in the U.S. and the euro area, using an estimated New Keynesian DSGE model that incorporates the zero (or effective) lower bound on the nominal interest rate. We find that this relation is downward sloping, but its slope is not necessarily one-for-one: increases in the optimal inflation rate are generally lower than declines in the steady-state real interest rate. Our approach allows us not only to assess the uncertainty surrounding the optimal inflation target, but also to determine the latter while taking into account the parameter uncertainty facing the policy maker, including uncertainty with regard to the determinants of the steady-state real interest rate. We find that in the currently empirically relevant region for the US as well as the euro area, the slope of the curve is close to -0.9. That finding is robust to allowing for parameter uncertainty.

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“…Since ζ is a major determinant of financial flows for privately held firms 7 , later, we perform robustness checks on ζ. Furthermore, we set α, one of the parameters in the firm production function to 0.3 and choose the elasticity of substitution across firms or goods to be ρ = 4 in line with estimates from micro data evidence (see Burstein and Hellwig (2008)). …”

Section: Calibrationmentioning

confidence: 99%

External financing and the role of financial frictions over the business cycle: Measurement and theory

Shourideh

Zetlin‐Jones

2017

Journal of Monetary Economics

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We examine the quantitative importance of financial market shocks in accounting for business cycle fluctuations. We emphasize the role financial markets play in reallocating funds from cash-rich, low productivity firms to cash-poor, high productivity firms. Using evidence on financial flows at the firm level, we find that for publicly traded firms (in Compustat), almost all investment is financed internally. However, using an alternative data source (Amadeus), we find that most investment by privately held firms is financed through borrowing. Motivated by these observations, we build a quantitative model featuring publicly and privately held firms that face collateral constraints and idiosyncratic risk over productivity as well as non-financial linkages. In our calibrated model, we find that a shock to the collateral constraints which generates a one standard deviation decline in the debt-to-asset ratio leads to a 0.5% decline in aggregate output on impact, roughly comparable to the effect of a one standard deviation shock to aggregate productivity in a standard real business cycle model. In this sense, we find that disturbances in financial markets are a promising source of business cycle fluctuations when non-financial linkages across firms are sufficiently strong. * We are indebted to V.V. Chari and Larry Jones for valuable advice. We would also like to thank

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Welfare Costs of Inflation in a Menu Cost Model

Cited by 71 publications

References 11 publications

CONDI: A Cost-of-Nominal-Distortions Index

CONDI: A Cost-of-Nominal-Distortions Index

The Optimal Inflation Target and the Natural Rate of Interest

External financing and the role of financial frictions over the business cycle: Measurement and theory

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