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Inventories, Markups and Real Rigidities in Sticky Price Models of the Canadian Economy

Inventories, Markups and Real Rigidities in Sticky Price Models of the Canadian Economy

We then introduce nominal price rigidities in addition to nominal wage stickiness. Price rigidities are important for our analysis since they imply countercyclical markups: e.g., during booms costs rise faster than prices, thus reducing the …rms’incentives to hold inventories. We show that this version of the model can indeed account for the dynamics of inventories in the data, as long as production costs are su¢ ciently responsive to monetary shocks, due to su¢ ciently strong diminishing returns to labor. Production costs must be su¢ ciently responsive to monetary shocks in order to reduce the intertemporal substitution motive. Moreover, when costs are volatile, price rigidities generate strongly countercyclical markups and further reduce the incentive to hold inventories. Overall, we …nd that versions of our model that account for the dynamics of inventories in the data imply that countercyclical variation in markups accounts for 50-80% of the response of real variables to monetary policy shocks. This stands in sharp contrast to the …ndings of Christiano, Eichenbaum and Evans (2005) who estimate parameters values that imply that markups play essentially no role in accounting for the real e¤ects of monetary shocks.
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Sticky Price versus Sticky Information Price: Empirical Evidence in the New Keynesian Setting

Sticky Price versus Sticky Information Price: Empirical Evidence in the New Keynesian Setting

About the output, we have mixed outcomes as in Caraiani 2013, the reactions of both models are very close, and then there is no specification being clearly better than the other ones. The two models do not generate an immediate jump and the shocks on the output are transmitted much less quickly. This lack of accurate results may come that from the fact the output dynamics are much more influenced by the different structural parameters and the rigidities. In the short-term, the inflation responses to monetary shocks exhibit larger and more volatile effects under the sticky information model than Calvo ’s model. This latter can explain the dynamic responses of the Tunisian macro-variables to monetary policy. It predicts negative hump-shaped output responses and shows smooth dynamic inflation responses. From the Calvo model, the inflation increases smoothly. In contrast, with the sticky information model, the inflation displays a hump-shaped response and indicates an increasing process after four quarters. This shape of response is also indicated in Trabandt (2007) that the sticky information generates hump shaped reaction to monetary policy shocks. This finding corresponds to the acceleration phenomenon observed by Mankiw and Reis (2002). From the sticky information model, there is an empirical correlation between the output and inflation as detected Dupor et al. 2010, Moro 2007, and Paustian and Pytlarczik 2006.
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The real exchange rate in sticky price models: does investment matter?

The real exchange rate in sticky price models: does investment matter?

This paper re-examines the ability of sticky-price models to generate volatile and persistent real exchange rates. We use a DSGE framework with pricing-to-market akin to those in Chari, et al. (2002) and Steinsson (2008) to illustrate the link between real exchange rate dynamics and what the model assumes about physical capital. We show that adding capital accumulation to the model facilitates consumption smoothing and significantly impedes the model’s ability to generate volatile real exchange rates. Our analysis, therefore, caveats the results in Steinsson (2008) who shows how real shocks in a sticky-price model without capital can replicate the observed real exchange rate dynamics. Finally, we find that the CKM (2002) persistence anomaly remains robust to several alternative capital specifications including set-ups with variable capital utilization and investment adjustment costs (see, e.g., Christiano, et al., 2005). In summary, the PPP puzzle is still very much alive and well.
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A Hybrid Sticky Price and Sticky Information Model

A Hybrid Sticky Price and Sticky Information Model

It may seem di¢cult to reconcile both stylized facts within the same model: when prices are kept constant less than one year (as the micro- economic stylized fact requires), it may seem di¢cult to account for the macroeconomic stylized fact that the impact of a monetary shock on in‡a- tion persists for more than one year. Taylor (1980) shows, however, that there is endogenous persistence: even if …rms change their prices every year, price adjustment will not be complete after one year if price setting is stag- gered and if there is strategic complementarity in price setting (that is, …rms tend to avoid large changes of their prices relative to those of competitors). Chari et al. (2000) respond that staggered price-setting cannot solve the persistence problem. The feature key to their …ndings is that their dynamic stochastic general equilibrium (DSGE) model yields strategic substitutabil- ity rather than strategic complementarity. Woodford (2003) argues that the parameterization of Chari et al. (2000) implies a "considerable degree of strategic substitutability," whereas they would …nd substantial strategic complementarity if they had taken into account the existence of …rm-speci…c production factors.
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Do Flexible Durable Goods Prices Undermine Sticky Price Models?

Do Flexible Durable Goods Prices Undermine Sticky Price Models?

Multi-sector sticky price models have surprising implications when durable goods have flexible prices. While in actual data the production of virtually all durables exhibits strong negative responses to monetary contractions, in dynamic general equilibrium models a monetary contraction causes the output of flexibly priced durables to expand. Indeed, in the polar case in which only nondurables have sticky prices, the negative comovement of durable and nondurable production exactly offsets and the behavior of aggregate output mimics that of a model with fully flexible prices. While this “neutrality” result is special, the “comovement problem” n the perverse response of flexibly priced durables to monetary policy shocks n is highly robust. When some durables prices are flexible and others sticky, the comovement problem still applies strongly to the subset of durables with flexible prices. We argue that new housing construction might be best characterized as a flexible price industry for which the comovement problem is relevant. The underlying reason for the comovement problem is the combination of a naturally high intertemporal elasticity of substitution for the purchases of durables and temporarily low marginal costs associated with economic contractions.
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Theft in Price-Volatile Markets: On the Relationship between Copper Price and Copper Theft

Theft in Price-Volatile Markets: On the Relationship between Copper Price and Copper Theft

We argue that the opportunities for offenders to dispose of stolen metals is central to the observed increases in metal thefts. Compared to common targets for theft such as cash or cell phones, copper (cabling) offers little in terms of inherent enjoyment or utility. Our proposal is that copper cabling is likely stolen with the intention of selling it on for financial gain through scrap metal markets. These markets may comprise both illegal and legal operations. Indeed, as is often the case, an illegal market may operate in the shadow of a legal market. For example, legal markets such as commonplace pawn shops may contribute to the problem by knowingly or unknowingly purchasing stolen copper, or deliberately not inquiring into its origins or source. Our hypothesis is that price surges due to the described supply-demand imbalance, increases the opportunities to sell copper at financially rewarding prices and thus represents an outlet for offenders to sell stolen copper - an outlet which would not have been financially viable nor available when copper prices were lower. As scrap copper price increases, stolen copper thus becomes an increasingly attractive target for theft.
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Relative prices, the price level and inflation: Effects of asymmetric and sticky adjustment

Relative prices, the price level and inflation: Effects of asymmetric and sticky adjustment

In the literature, a number of transformations have been suggested as a proxy for an oil price shock 3 . A final transformation for oil shocks was proposed by Hamilton (1996a), who also advocated an investment-uncertainty transmission mechanism. He argued that ―[i]f one wants a measure of how unsettling an increase in the price of oil is likely to be for the spending decisions of consumers and firms, it seems more appropriate to compare the current price of oil with where it has been over the previous year rather than during the previous quarter alone (p.216)‖. Specifically, his ―net oil price increase‖ (NOPI) transformation equals the percentage increase over the previous year’s high if that is positive, and zero otherwise. This creates a series which is similar to other measures of oil price shocks until 1986 (when price increases were infrequent they usually set new annual highs), but filters out many of the small choppy movements since then. It also explicitly rules out effects from price decreases.
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Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics

Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics

In addition, although this simple relationship between the change in inflation and the output gap is often used as a textbook example of the traditional “accelera- tionist” Phillips curve, its fit is actually rather poor in quarterly data—specifically, over the sample period considered here, this model explains only about 3-1/2 per- cent of the variance in the first-difference in inflation. This mediocre fit is illustrated graphically in Figure 2. The top panel of the figure plots the time series for the first-difference of inflation along with the time series for the model’s fitted values; because the change in inflation is such a volatile series, it is somewhat difficult to accurately assess the model’s fit from this chart. Hence, the lower panel of the figure presents a simple scatter diagram; as can be seen from the almost random distribution of the data points, the ability of this model to predict even the sign of the change in inflation is quite poor. 10
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Inflation Targets, Credibility and Persistence In a Simple Sticky-Price Framework

Inflation Targets, Credibility and Persistence In a Simple Sticky-Price Framework

One difference, though, between our results and those in Ball’s paper concerns the long- run tradeoff between the levels of inflation and output. Ball described his example as one in which the gradual slowing in money growth produces a boom, where this is defined as “an output path that rises above the natural rate temporarily and never falls below the natural rate.” 11 Thus, in his example there was no permanent reduction in output despite the lower level of inflation. The explanation for this difference turns out to be that Ball assumed a model in which firms do not discount profits, implying β = 1. In fact, this observation helps us to reconcile what is perhaps the most puzzling aspect of Ball’s result relative to the usual intuition about the new-Keynesian Phillips curve. From equation (23), we know that this relationship predicts that inflation depends positively on current and expected future output gaps. How, then, could such a model generate a path in which inflation declines even though expectations of future output gaps always lie at or above their baseline values—as in Ball’s disinflationary boom example?
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Inflation Targeting and the Role of Money in a Model with Sticky Prices and Sticky Money

Inflation Targeting and the Role of Money in a Model with Sticky Prices and Sticky Money

We show how money replaces the expectations as t o future technology shocks and discuss how the central bank can use the current growth of nominal balances as [r]

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Co-movement in sticky price models with durable goods

Co-movement in sticky price models with durable goods

Figure 1 exhibits the model economy’s behavior to a policy shock that causes the nominal interest rate to increase by 25 basis points (100 annual basis points). The model is labeled “Baseline.” The endogeneity of the policy rule implies that the needed policy innovation is larger than this, = 0.47. Price stickiness in the non-durable sector leads to a sharp decline in non-durable production (-0.72). This implies a decline in demand for labor, and thus a decline in nominal marginal cost for the durable goods industry. These lower production costs lead to a sharp fall in the relative price of durable goods prices and a sharp increase in durable goods production. Durable good investment increases by 3.3%. Total employment and total production are essentially unchanged, with employment falling by only 0.007%. All of these effects are protracted because of the persistence in the interest rate change.
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Endogenous Fixprices and Sticky Price Adjustment of Risk averse Firms

Endogenous Fixprices and Sticky Price Adjustment of Risk averse Firms

6 we introduce a small cost of price adjustment into the model where no endogenous fixprices exist and show that this reestablishes the qualitative distinction between risk neutrality an[r]

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Endogenous Fixprices and Sticky Price Adjustment of Risk-averse Firms

Endogenous Fixprices and Sticky Price Adjustment of Risk-averse Firms

When no such endogenous fixpfice exists, the size of price adjustment still tends to zero as risk aversion tends to infinity, and to any arbitrarily small menu c[r]

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The Dynamic Behavior of the Real Exchange Rate in Sticky Price Models

The Dynamic Behavior of the Real Exchange Rate in Sticky Price Models

To summarize, sticky price models driven solely by money supply shocks are unable to match the humped shape and the persistence of the real exchange rate even when a large degree is stra[r]

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Can producer currency pricing models generate volatile real exchange rates?

Can producer currency pricing models generate volatile real exchange rates?

The high volatility of the real exchange rate is one of the most important stylized facts in international macroeconomics. In their seminal work, Chari et al. (2002) show that it is possible to reproduce quantitatively the empirical volatility of the real exchange rate in a dynamic stochastic general equilibrium model with sticky prices, provided certain conditions on preferences are satisfied and prices are held fixed for at least one year.

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(1) Benchmark Sticky Price NK Model.pdf

(1) Benchmark Sticky Price NK Model.pdf

For the technology shock, the variable N is included in the variable declara- tions. This increases the number of variables by one. Therefore, the number of equation was increased by one through the inclusion of the production function in logs (up a first order). Finally, n was declared in the steady state block. The model responses are all in quarterly terms. In order to replicates figures (3.1) & (3.2) in Gali, variables {π t , i t , r t } must be multiplied by four to transform

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An evaluation approach for a physically-based sticky lip model

An evaluation approach for a physically-based sticky lip model

The face model was created using a combination of FaceGen [28] and Blender [29]. An initial model, based on photographs of the first author, was created in FaceGen. This model was exported to Blender, where the teeth, tongue, and large portions of the face were removed to leave the lower, front half of the face. This process does not produce a perfect recreation of the user’s face, for example there are some discrepancies between the lip shapes of the real person and the model. However, this does not impact on the work in this paper as we are interested in the overall behaviour of the mouth, particularly the timing of dynamic events such as lips parting, rather than accurately recreating a single person’s mouth. Different material regions—skin and a thin saliva layer between the lips—were then defined using Blender’s material feature, as shown in Figure 1. A bespoke program was then used to extrude the quads of the surface mesh into hexahedra, as under-integrated linear hexahedral elements are used in the finite element simulation. The final model consists of 3414 hexahedral elements.
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A Naïve Sticky Information Model of Households’ Inflation Expectations

A Naïve Sticky Information Model of Households’ Inflation Expectations

Based on our empirical findings, we extend the agent-based epidemiology model, proposed by Carroll (2006), by deriving a relative simple adaptation of that model, suitable for estimation. The model assumes a constant personal probability for each agent to read a newspaper article on inflation. This variation in their newspaper reading propensities could explain differences in survey expectations across demographic groups, documented in Bryan and Venkatu (2001a, b) and Souleles (2004). The model differs from that of Carroll (2003, 2006) in that it no longer assumes agents to be ‘infected’ by rare newspaper forecasts. Rather, the source of ‘infection’ is the past release of annualized monthly inflation. The model is estimated with classified household-level survey data from 1981/3 to 2001/4 constructed by the Survey Research Center (SRC) at the University of Michigan. The results indicate that people on average update their expectations roughly once a year, which is in accordance with the previous literature, while their updating probabilities vary from 0.12 to 0.42.
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A “Local” Model of the Firm: Sticky prices and the Phillips Curve

A “Local” Model of the Firm: Sticky prices and the Phillips Curve

This is not itself a novel idea, with special emphasis on Lucas (1972), but Gordon (1981) captures its limitation as, “A crucial weakness of the Lucas (1972) and Barro (1976) papers is that there is no device to generate persistence of output movements as observed in real,world business cycles.” Meltzer (1995) offers alternative explanations for the same end, “As in Bomhoff (1983), a principal difficulty in interpreting information is uncertainty about how long changes will persist. This is the central idea developed in Brunner, Cukierman and Meltzer (1983), but we took the idea from Muth’s (1961) seminal paper on rational expectations. In Meltzer (1982), I used these ideas to discuss price setting.” While this offers temporary rigidity, it is again difficult to explain the persistence factor.
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A Sticky-Information General-Equilibrium Model for Policy Analysis

A Sticky-Information General-Equilibrium Model for Policy Analysis

Monetary policy shocks play a signi…cantly larger role in explaining the variability of output growth and hours worked than they did in the United States, while productivity shocks are a[r]

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