The Impact of the 2008 Crisis on UK Prices: What We Can Learn from the CPI Microdata1

This paper takes the locally collected price quotes used to construct the CPI index in the UK for the period 1996–2013 and explores the impact of the Great Recession (2008-9) on the pricing behaviour of firms. We develop a time series framework which captures the link between macroeconomic variables and the behaviour of prices in terms of the frequency of price change, the dispersion of price levels and the size, dispersion and kurtosis of price-growth. We find strong evidence for inflation having an effect, but not output. The change in the behaviour of prices during the Great Recession is largely explained by the changes in inflation and VAT. Nevertheless, the magnitude of the inflation effect is sufficiently small that it need not influence monetary policy.     

Mismatch Shocks and Unemployment During the Great Recession

We investigate the macroeconomic consequences of fluctuations in the effectiveness of the labor market matching process with a focus on the Great Recession. We conduct our analysis in the context of an estimated medium‐scale dynamic stochastic general equilibrium model with sticky prices and equilibrium search unemployment that features a shock to the matching efficiency (or mismatch shock). We find that this shock is not important for unemployment fluctuations in normal times. However, it plays a somewhat larger role during the Great Recession when it contributes to raise the actual unemployment rate by around 1.3 percentage points and the natural rate by around 2 percentage points. The mismatch shock is the dominant driver of the natural rate of unemployment and explains part of the recent shift of the Beveridge curve. Copyright © 2016 John Wiley & Sons, Ltd.     

Endogenous search,price dispersion,and welfare

This paper studies the welfare cost of inflation in a frictional monetary economy with endogenous consumer search. Equilibrium entails price dispersion, where sellers compete for buyers by posting prices. We identify three channels through which inflation affects welfare. The real balance channel is the source of welfare loss. Its interaction with the price posting channel generates a welfare cost larger than Lucas (2000). The search channel reduces the welfare cost by more than one half through general equilibrium effect. The aggregate effect of these three channels on welfare is non-monotonic. Additionally, the welfare cost of inflation fluctuations is negligible.     

Price Inflation in the UK: Has Anything Changed?

Since leaving the ERM, the UK has had low inflation while unemployment has fallen substantially. This suggests that wage and price behaviour may have changed over the recent past. In this article, Ken Coutts and Brian Henry review the evidence for such change, particularly in pricing behaviour, but find little convincing evidence of a major structural shift. Rather, low inflation can be attributed to the effect of weak demand and low capacity utilisation on prices (and wages) which are larger and longer lasting than is generally believed, together with beneficial effects from low world inflation. On leaving the ERM, the government also instituted a classic combination of expenditure-switching and expenditure-reducing policies which played an essential part in promoting recovery without increasing inflation.     

Time Variation in Macro‐Financial Linkages

We analyze the contribution of credit spread, house and stock price shocks to the US economy based on a time‐varying parameter vector autoregressive model. We find that the contribution of financial shocks to gross domestic product growth fluctuates from about 20% in normal times to more than 50% during the Great Recession. The Great Recession and the subsequent weak recovery can largely be traced back to negative housing shocks. Housing shocks have become more important for the real economy since the early 2000s, and negative housing shocks are more important than positive ones. Unexpected increases in credit spreads have not been deflationary recently. Copyright © 2016 John Wiley & Sons, Ltd.     

Catching-up and inflation in Europe: Balassa–Samuelson, Engel's Law and other culprits

This study analyses the impact of economic catching-up on annual inflation rates in the European Union with a special focus on the new member countries of Central and Eastern Europe. Using an array of estimation methods, we show that the Balassa-Samuelson effect is not an important driver of inflation rates. By contrast, we find that the initial price level and regulated prices strongly affect inflation outcomes in a nonlinear manner and that the extension of Engel's Law may hold during periods of very fast growth. We interpret these results as a sign that price level convergence comes from goods, market and non-market service prices. Furthermore, we find that the Phillips curve flattens with a decline in the inflation rate, that inflation is more persistent and that commodity prices have a stronger effect on inflation in a higher inflation environment.     

Short-term inflation projections: A Bayesian vector autoregressive approach

In this paper we construct a large Bayesian Vector Autoregressive model (BVAR) for the Euro area that captures the complex dynamic inter-relationships between the main components of the Harmonized Index of Consumer Prices (HICP) and their determinants. The model generates accurate conditional and unconditional forecasts in real-time. We find a significant pass-through effect of oil-price shocks on core inflation and a strong Phillips curve during the Great Recession.     

房价涨幅与CPI涨幅的关系研究

人们感觉房价涨跌与CPI涨跌幅度不一致的主要原因,是CPI计算过程中没有直接包括房价因素。实质上房价涨幅与CPI涨幅之间既相互促进又相互制约,二者通过居住类因素的价格变动来实现相互促进,通过政府采取的"抑制通货膨胀"、"防范金融危机"措施来实现相互制约。目前既要调整CPI计算方案,又要建立房价涨幅与CPI涨幅的组合控制标准。     

The impact of monetary policy in the midst of big shocks

This paper studies the impact of Federal Reserve policies that created the largest deviations from price stability during the Fed׳s first 100 years: the post-World War I deflation, the deflation of the Great Depression, the inflation of World War II, and the Great Inflation of the 1970s. In terms of their macroeconomic impacts, I find that deflation was uniquely depressing in the 1930s because of cartel policies that prevented nominal prices and wages from adjusting to clear markets, and not because deflation is generically depressing. I find that the biggest impact of monetary policy during World War II was in debasing debt through inflation. I find that the main drivers of the 1970s economy were long-run changes in productivity and the labor market, and that there may have been little that the Fed could have done at this time to expand employment and output. More broadly, I find that macroeconomic performance would have been better over the Fed׳s first century had the Fed followed a monetary policy to deliver stable prices.     

The Outlook for Wages

Price inflation is on the way down The most dramatic evidence of this is the fall in retail price inflation as the VAT effect comes out of the index. But as the Charts overleaf show, there are clear signs of a fall in inflation rates in wholesale output prices and, more strikingly still, in manufacturers' input prices.
This may be good news for consumers, but so far any reduction in inflation has been chiefly at the expense of profit margins as price rises have fallen below the increase in wage costs. The question for the immediate future is whether the fall in price inflation will now lead to a fall in wage inflation     

Prices,wages, and import prices in Israel: 1970–1983

This paper presents an empirical investigation of the dynamics of prices, wages and import prices in a small open economy using data for Israel in the accelerating inflationary period of 1970–1983. The appropriateness of the specification of a price equation as a function of import prices and wages is critically reviewed using Sims's methodology. The main finding is that the only significant lags in the representation of the rate of change in prices, wages and import prices are the lags of the rate of change in prices (the rate of inflation). Other factors in the representation are attributed to market forces influencing real wages and the real exchange rate. Testing the correlation of the estimated VAR residuals leads to the conclusion that a short-term inflation equation specified as a function of present and past wages is not acceptable. A further decomposition of the VAR residuals presents evidence in favour the hypothesis that price shocks contribute to the explanation of the inflationary process in Israel. A rational expectation interpretation of the results is proposed, followed by some policy implications.     

The impact of rising EU Allowance prices on core inflation in the Eurozone

This article examines the impact of EU Allowance (EUA) prices on core inflation in the Eurozone between 2005 and 2022. The empirical results suggest that a positive shock to the EUA price led to higher long-run inflation expectations and core inflation. This implies that the rise in EUA prices can be passed on to consumers and enterprises, leading to an increase in production costs and consumer prices. And, while a positive shock to EUA prices may promote investment in renewable energy in the short term, the impact is not statistically significant and does not last long. The results suggest considerable potential for European policymakers to re-examine policy mechanisms to accelerate renewable energy investment and maintain price stability in the medium term.     

Price Stickiness in the US and Europe Revisited: Evidence from Internet Prices*

This paper compares price stickiness on the Internet and in traditional brick‐and‐mortar stores and examines differences across five countries: France, Germany, Italy, the UK and the US. Contrary to conventional retail prices, we find that Internet prices change less often in the US than in EU countries. However, this does not hold for all product categories. Second, prices on the Internet are not necessarily more flexible than prices in brick‐and‐mortar stores. Third, our dataset reveals substantial heterogeneity in the frequency of price changes across Internet shops. Finally, panel logit estimates suggest that the likelihood of observing a price change is a function of both state‐dependent and time‐dependent factors.     

Price dispersion and optimal price categories with limited memory consumers

In this paper, we study consumers with limited memory and examine the effects of their price categorization on the pricing strategies of competing firms. The valuations of consumers are assumed to be heterogeneous. We find that it is possible to observe price dispersion even when each firm charges a single price if the consumers categorize prices non‐optimally. Moreover, we demonstrate that the likelihood of a price dispersion outcome is reduced when consumers with limited memory set up the price categories optimally. These findings suggest that the consumers' limited memory and their sub‐optimal behavior, that is, their inability to choose price categories optimally can be a reason for observed price dispersion.     

Dynamic factor model with infinite‐dimensional factor space: Forecasting

The paper compares the pseudo real‐time forecasting performance of three dynamic factor models: (i) the standard principal component model introduced by Stock and Watson in 2002; (ii) the model based on generalized principal components, introduced by Forni, Hallin, Lippi, and Reichlin in 2005; (iii) the model recently proposed by Forni, Hallin, Lippi, and Zaffaroni in 2015. We employ a large monthly dataset of macroeconomic and financial time series for the US economy, which includes the Great Moderation, the Great Recession and the subsequent recovery (an update of the so‐called Stock and Watson dataset). Using a rolling window for estimation and prediction, we find that model (iii) significantly outperforms models (i) and (ii) in the Great Moderation period for both industrial production and inflation, and that model (iii) is also the best method for inflation over the full sample. However, model (iii) is outperformed by models (ii) and (i) over the full sample for industrial production.     

Stock price reactions to stock dividend announcements: A case from a sluggish economic period

The 2007 financial crisis and the Great Recession that followed resulted in a loss of confidence among investors, and regaining their full trust and confidence has been a challenge for companies. Although economic growth has been volatile throughout the postwar World War II period, recent growth (2008–2015) has been remarkably weaker than in the previous low-growth period (1974–1995). The 2006–2015 period is often characterized by sluggish economic growth. This study investigates stock price reactions to stock dividend announcements, 30 days before and after the announcement dates, of publicly traded companies in the period 2006–2012. We use an event study methodology for 460 events and daily stock price data for companies in the CRSP historical data set. The study shows a significant reaction in stock prices around the event date. On average, stock prices reacted positively to stock dividend announcements. However, compared to previous findings of abnormal returns (5.9%), results from this study show small abnormal returns (about 1.81%) attributable to stock dividend announcements that are cumulative of the announcement day and up to 3-day post-announcement days. Our estimates are even lower than the 2.01% stock price reaction obtained in the 1987–1996 period.     

Euro area real-time density forecasting with financial or labor market frictions

We compare real-time density forecasts for the euro area using three DSGE models. The benchmark is the Smets and Wouters model, and its forecasts of real GDP growth and inflation are compared with those from two extensions. The first adds financial frictions and expands the observables to include a measure of the external finance premium. The second allows for the extensive labor-market margin and adds the unemployment rate to the observables. The main question that we address is whether these extensions improve the density forecasts of real GDP and inflation and their joint forecasts up to an eight-quarter horizon. We find that adding financial frictions leads to a deterioration in the forecasts, with the exception of longer-term inflation forecasts and the period around the Great Recession. The labor market extension improves the medium- to longer-term real GDP growth and shorter- to medium-term inflation forecasts weakly compared with the benchmark model.     

Does the Phillips curve help to forecast euro area inflation?

We find that it does, but choosing the right specification is not trivial. Based on an extensive forecast evaluation we document notable forecast instabilities for most simple Phillips curves. Euro area inflation was particularly hard to forecast in the run-up to the Economic and Monetary Union and after the sovereign debt crisis, when the trends—and, for the latter period, also the amount of slack—were harder to pin down. Yet, some specifications outperform a univariate benchmark and point to the following lessons: (i) the key type of time variation to consider is an inflation trend; (ii) a simple filter-based output gap works well, but after the Great Recession it is outperformed by endogenously estimated slack or by “institutional” estimates; (iii) external variables do not bring forecast gains; (iv) newer-generation Phillips curve models with several time-varying features are a promising avenue for forecasting; and (v) averaging over a wide range of modelling choices helps.     

On the Time-Varying Effects of Economic Policy Uncertainty on the US Economy

We study the impact of Economic Policy Uncertainty (EPU) on the US Economy by using a VAR with time-varying coefficients. The coefficients are allowed to evolve gradually over time which allows us to discover structural changes without imposing them a priori. We find three different regimes, which match the three major periods of the US economy, namely the Great Inflation, the Great Moderation and the Great Recession. The initial impact on real GDP ranges between −0.2% for the Great Inflation and Great Recession and −0.15% for the Great Moderation. In addition, the adverse effects of EPU are more persistent during the Great Recession providing an explanation for the slow recovery. This regime dependence is unique for EPU as the macroeconomic consequences of Financial Uncertainty turn out to be rather time invariant.     

Prices and Regional Variation in Welfare

One would expect regional differences in prices to influence conclusions concerning levels and distributions of well-being. Although there is anecdotal evidence of significant price dispersion across regions, there is no governmental source of data that measures differences in price levels. In this paper I integrate estimates of regional prices with expenditure data from the Consumer Expenditure Surveys to assess the influence of price differences on living standards in the United States. While prices have little effect on inequality, estimates of poverty and the standard of living change substantially with the inclusion of regional price variation.