Endogenous Price Stickiness,Trend Inflation,and Macroeconomic Stability

Previous studies show that higher trend inflation is more likely to induce indeterminacy of equilibrium in sticky‐price models based on micro evidence that each period a fraction of prices is kept unchanged. This paper demonstrates that when the degree of price stickiness is endogenously determined in a Calvo model, indeterminacy caused by higher trend inflation is less likely. A key factor for determinacy is the long‐run inflation elasticity of output implied by the New Keynesian Phillips curve. This elasticity declines substantially with higher trend inflation in the case of exogenously given price stickiness, whereas in the case of endogenous price stickiness the decline in the elasticity is mitigated because higher trend inflation leads to a higher probability of price adjustment.     

DO INVESTMENT‐SPECIFIC TECHNOLOGICAL CHANGES MATTER FOR BUSINESS FLUCTUATIONS? EVIDENCE FROM JAPAN

The observed decline in the relative price of investment goods to consumption goods in Japan suggests the existence of investment‐specific technological (IST) changes. We examine whether IST changes are a major source of business fluctuations in Japan, by estimating a dynamic stochastic general equilibrium model using Bayesian methods. We show that IST changes are less important than neutral technological changes in explaining output fluctuations. We also demonstrate that investment fluctuations are mainly driven by shocks to investment adjustment costs. Such shocks represent variations of costs involved in changing investment spending, such as financial intermediation costs. We find that the estimated series of the investment adjustment cost shock correlates strongly with the diffusion index of firms' financial position in the Tankan (Short‐term Economic Survey of Enterprises in Japan). Therefore, we argue that the large decline in investment growth in the early 1990s was due to an increase in investment adjustment costs stemming from firms' financial constraints after the collapse of Japan's asset price bubble.     

Determinacy under Inflation Targeting Interest Rate Policy in a Sticky Price Model with Investment (and Labor Bargaining)

In a sticky price model with investment spending, recent research shows that inflation-forecast targeting interest rate policy makes determinacy of equilibrium essentially impossible. We examine a necessary and sufficient condition for determinacy under interest rate policy that responds to a weighted average of an inflation forecast and current inflation. This condition demonstrates that the average-inflation targeting policy ensures determinacy as long as both the response to average inflation and the relative weight of current inflation are large enough. We also find that interest rate policy that responds solely to past inflation guarantees determinacy when its response satisfies the Taylor principle and is not large. These results still hold even when wages and hours worked are determined by Nash bargaining.     

Changes in the Federal Reserve Communication Strategy: A Structural Investigation

This paper structurally investigates the changes in the Fed's communication strategy since the mid‐1990s through the lens of anticipated and unanticipated disturbances to a Taylor rule. The anticipated disturbances are identified using Treasury bond yield data in estimating a dynamic stochastic general equilibrium (DSGE) model with a term structure of interest rates. Our estimation results show that the Fed's decisions were unanticipated for market participants until 1999, but thereafter a larger portion of its future policy actions tended to be communicated in advance. We also find that the relative contribution of the anticipated monetary policy disturbances to macroeconomic fluctuations became larger after 1999. The bond yield data is indispensable to these results, since it contains crucial information on an expected future path of the federal funds rate.     

A Theory of Intrinsic Inflation Persistence

We propose a novel theory of intrinsic inflation persistence by introducing trend inflation and Kimball (1995)-type aggregators of individual differentiated goods and labor in a model with staggered price- and wage-setting. Under nonzero trend inflation, the non-CES (constant elasticity of substitution) aggregator of goods and staggered price-setting give rise to a variable real marginal cost of goods aggregation, which becomes a driver of inflation. This marginal cost consists of an aggregate of the goods' relative prices, which depends on past inflation, thereby generating intrinsic inertia in inflation. Likewise, the non-CES aggregator of labor and staggered wage-setting lead to intrinsic inertia in wage inflation, which enhances the persistence of price inflation. With the theory we show that inflation exhibits a persistent, hump-shaped response to monetary policy shocks. We also demonstrate that lower trend inflation reduces inflation persistence and that a credible disinflation leads to a gradual decline in inflation and a fall in output.