James Costain
- 21 September 2021
- OCCASIONAL PAPER SERIES - No. 265Details
- Abstract
- This paper – which takes into consideration overall experience with the Harmonised Index of Consumer Prices (HICP) as well as the improvements made to this measure of inflation since 2003 – finds that the HICP continues to fulfil the prerequisites for the index underlying the ECB’s definition of price stability. Nonetheless, there is scope for enhancing the HICP, especially by including owner-occupied housing (OOH) using the net acquisitions approach. Filling this long-standing gap is of utmost importance to increase the coverage and cross-country comparability of the HICP. In addition to integrating OOH into the HICP, further improvements would be welcome in harmonisation, especially regarding the treatment of product replacement and quality adjustment. Such measures may also help reduce the measurement bias that still exists in the HICP. Overall, a knowledge gap concerning the exact size of the measurement bias of the HICP remains, which calls for further research. More generally, the paper also finds that auxiliary inflation measures can play an important role in the ECB’s economic and monetary analyses. This applies not only to analytical series including OOH, but also to measures of underlying inflation or a cost of living index.
- JEL Code
- C43 : Mathematical and Quantitative Methods→Econometric and Statistical Methods: Special Topics→Index Numbers and Aggregation
C52 : Mathematical and Quantitative Methods→Econometric Modeling→Model Evaluation, Validation, and Selection
C82 : Mathematical and Quantitative Methods→Data Collection and Data Estimation Methodology, Computer Programs→Methodology for Collecting, Estimating, and Organizing Macroeconomic Data, Data Access
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
- 27 June 2019
- RESEARCH BULLETIN - No. 59Details
- Abstract
- Recent low inflation is motivating new research to better characterise how individual firms and workers set prices and wages. In this article, we describe a new approach which emphasises that the costs of decision-making may limit the precision of price and wage changes. As well as making better sense of price and wage changes in microeconomic data, this new approach also strikes a middle ground between two leading models of monetary policy transmission, improving our quantitative understanding of the short-run effects of monetary policy on output and the short-run trade-off between inflation and unemployment.
- JEL Code
- E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
D81 : Microeconomics→Information, Knowledge, and Uncertainty→Criteria for Decision-Making under Risk and Uncertainty
C73 : Mathematical and Quantitative Methods→Game Theory and Bargaining Theory→Stochastic and Dynamic Games, Evolutionary Games, Repeated Games
- 26 April 2019
- WORKING PAPER SERIES - No. 2272Details
- Abstract
- We study the effects of monetary shocks in a model of state-dependent price and wage adjustment based on “control costs”. Suppliers of retail goods and of labor are both monopolistic competitors that face idiosyncratic productivity shocks and nominal rigidities. Stickiness arises because precise decisions are costly, so agents choose to tolerate small errors in the timing of adjustments. Our simulations are calibrated to microdata on the size and frequency of price and wage changes. Money shocks have less persistent real effects in our state-dependent model than they would a time-dependent framework, but nonetheless we obtain sufficient monetary nonneutrality for consistency with macroeconomic evidence. Nonneutrality is primarily driven by wage rigidity, rather than price rigidity. State-dependent nominal rigidity implies a flatter Phillips curve as trend inflation declines, because nominal adjustments become less frequent, making short-run inflation less reactive to shocks.
- JEL Code
- E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
D81 : Microeconomics→Information, Knowledge, and Uncertainty→Criteria for Decision-Making under Risk and Uncertainty
C73 : Mathematical and Quantitative Methods→Game Theory and Bargaining Theory→Stochastic and Dynamic Games, Evolutionary Games, Repeated Games
- 15 July 2014
- WORKING PAPER SERIES - No. 1693Details
- Abstract
- We model retail price stickiness as the result of errors due to costly decision-making. Under our assumed cost function for the precision of choice, the timing of price adjustments and the prices firms set are both logit random variables. Errors in the prices firms set help explain micro
- JEL Code
- E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
D81 : Microeconomics→Information, Knowledge, and Uncertainty→Criteria for Decision-Making under Risk and Uncertainty
C73 : Mathematical and Quantitative Methods→Game Theory and Bargaining Theory→Stochastic and Dynamic Games, Evolutionary Games, Repeated Games
- 25 August 2011
- WORKING PAPER SERIES - No. 1375Details
- Abstract
- This paper proposes two models in which price stickiness arises endogenously even though firms are free to change their prices at zero physical cost. Firms are subject to idiosyncratic and aggregate shocks, and they also face a risk of making errors when they set their prices. In our first specification, firms are assumed to play a dynamic logit equilibrium, which implies that big mistakes are less likely than small ones. The second specification derives logit behavior from an assumption that precision is costly. The empirical implications of the two versions of our model are very similar. Since firms making sufficiently large errors choose to adjust, both versions generate a strong "selection effect" in response to a nominal shock that eliminates most of the monetary nonneutrality found in the Calvo model. Thus the model implies that money shocks have little impact on the real economy, as in Golosov and Lucas (2007), but fits microdata better than their specification.
- JEL Code
- E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
D81 : Microeconomics→Information, Knowledge, and Uncertainty→Criteria for Decision-Making under Risk and Uncertainty
C72 : Mathematical and Quantitative Methods→Game Theory and Bargaining Theory→Noncooperative Games
- 20 April 2011
- WORKING PAPER SERIES - No. 1333Details
- Abstract
- Starting from the assumption that firms are more likely to adjust their prices when doing so is more valuable, this paper analyzes monetary policy shocks in a DSGE model with firm-level heterogeneity. The model is calibrated to retail price microdata, and inflation responses are decomposed into “intensive”, “extensive”, and “selection” margins. Money growth and Taylor rule shocks both have nontrivial real effects, because the low state dependence implied by the data rules out the strong selection effect associated with fixed menu costs. The response to firm-specific shocks is gradual, though inappropriate econometrics might make it appear immediate.
- JEL Code
- E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
D81 : Microeconomics→Information, Knowledge, and Uncertainty→Criteria for Decision-Making under Risk and Uncertainty
- 15 May 2009
- WORKING PAPER SERIES - No. 1053Details
- Abstract
- This paper reviews recent approaches to modelling the labour market and assesses their implications for inflation dynamics through both their effect on marginal cost and on price-setting behaviour. In a search and matching environment, we consider the following modelling set-ups: right-to-manage bargaining vs. efficient bargaining, wage stickiness in new and existing matches, interactions at the firm level between price and wage-setting, alternative forms of hiring frictions, search on-the-job and endogenous job separation. We find that most specifications imply too little real rigidity and, so, too volatile inflation. Models with wage stickiness and right-to-manage bargaining or with firm-specific labour emerge as the most promising candidates.
- JEL Code
- E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
E24 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital
J64 : Labor and Demographic Economics→Mobility, Unemployment, Vacancies, and Immigrant Workers→Unemployment: Models, Duration, Incidence, and Job Search - Network
- Wage dynamics network