Guido Ascari

Staggered prices and trend inflation: some nuisances

Most of the papers in the sticky-price literature are based on a log- linearization around the zero inflation steady state, a simplifying but counterfactual assumption. This paper shows that when trend inflation is considered, both the long-run and the short-run properties of DGE models based on the Calvo staggered price model change dramatically. It follows that results obtained by models log-linearized around a zero inflation steady state are quite misleading. Furthermore, the same is not true for models based on the Taylor staggered price model, which is robust to changes in trend inflation. As a conclusion, the Taylor model is to be preferred, unless one is willing to index nominal variables.

Optimal Monetary Policy Under Low Trend Inflation

In the monetary policy literature it is commonly assumed that trend inflation is zero, despite overwhelming evidence that zero inflation is neither empirically relevant nor a practical objective for central bank policy. We therefore extend the standard New Keynesian model to allow for positive trend inflation, showing that even low trend inflation has strong effects on optimal monetary policy and the dynamics of inflation, output, and interest rates. Under discretion, the efficient policy deteriorates and there is no guarantee of determinacy. Even with commitment, targeting non-zero trend inflation leads to substantial welfare losses. Our results serve as a warning against indiscriminate use of models assuming zero trend inflation.

Optimising Agents, Staggered Wages and Persistence in the Real Effects of Money Shocks

In this paper we incorporate Taylors (1979) staggered wage setting into an optimising dynamic general equilibrium framework to study whether staggered wages could induce a high degree of persistence in the real effects of money shocks. We conclude that high persistence is an unlikely outcome. Sensible values of the microeconomic parameters and/or a moderate rate of underlying inflation imply a low degree of persistence. Furthermore, once explicit microfoundations are taken into account, we show that: (i) the model is highly non-linear; (ii) the inertia of the system is inversely related to the level of average inflation.

Price/Wage Staggering and Persistence: A Unifying Framework

In this paper, we provide a general unified framework to clarify the issue of persistence of real effects of money shocks in staggered wage/price models. We mainly aim to: (i) highlight which features of the underlying economy, and particularly of the labour market, are crucial for generating output persistence; (ii) analyse the differences between price and wage staggering. Copyright Blackwell Publishing Ltd, 2003.

Calvo vs. Rotemberg in a trend inflation world: An empirical investigation

This paper estimates and compares new-Keynesian DSGE monetary models of the business cycle derived under two different pricing schemes - Calvo, Rotemberg - and a positive trend inflation rate. Our empirical findings (i) support trend inflation-equipped models as better fitting during the U.S. great moderation period, (ii) provide evidence in favor of the statistical superiority of the Calvo setting, and (iii) suggest the absence of price indexation under the Calvo mechanism only. Possibly, the superiority of the Calvo model (against Rotemberg) is due to the restrictions implied by such pricing scheme for the aggregate demand equation. The determinacy regions associated to the two estimated models indicate relevant differences in the implementable simple policies. Our findings call for the development of monetary policy models consistently embedding a positive trend inflation rate and possibly based on a Calvo pricing scheme.

Trend Inflation and Firms Price‐Setting: Rotemberg Versus Calvo

We compare the Calvo and Rotemberg price‐setting mechanisms in a New Keynesian model with trend inflation. We show that: the long‐run relationship between inflation and output is positive in Rotemberg and negative in Calvo; the dynamics of the two models differ even to a first‐order approximation; positive trend inflation enlarges the determinacy region in the Rotemberg model, whereas it shrinks it in the Calvo model; the responses of output and inflation to technology shocks are amplified by trend inflation in Calvo, whereas they are dampened in Rotemberg; the two models imply differing non‐linear adjustments after a disinflation.

Disinflation Effects in a Medium-Scale New Keynesian Model: Money Supply Rule Versus Interest Rate Rule

Empirical studies show that successful disinflations entail a period of output contraction. Using a medium-scale New Keynesian model, we compare the effects of disinflations of different speed and timing, implemented through either a money supply or an interest rate rule. In terms of transitional output loss, cold-turkey disinflations under an interest rate rule are less costly than those under a money supply rule and are accomplished more rapidly. Furthermore, gradual or anticipated disinflations deliver lower sacrifice ratios. From a welfare perspective, despite the transitional economic contraction, disinflations are overall welfare-improving. Interestingly, the overall welfare gain is not affected by how the disinflation is actually implemented: what really matters is the achievement of a permanently lower inflation rate.

Staggered wages and output dynamics under disinflation

We study the output costs of a reduction in monetary growth in a dynamic general equilibrium model with staggered wages. The money wage is fixed for two periods, and is chosen according to intertemporal optimisation. Agents have labour market monopoly power. We show that the introduction of microfoundations helps to resolve the puzzle raised by directly postulated models, namely that disinflation in staggered pricing models causes a boom. In our model disinflation, whether unanticipated or anticipated, unambiguously causes a slump.

Fat-tail Distributions and Business-Cycle Models

Recent empirical findings suggest that macroeconomic variables are seldom normally dis- tributed. For example, the distributions of aggregate output growth-rate time series of many OECD countries are well approximated by symmetric exponential-power (EP) den- sities, with Laplace fat tails. In this work, we assess whether Real Business Cycle (RBC) and standard medium-scale New-Keynesian (NK) models are able to replicate this sta- tistical regularity. We simulate both models drawing Gaussian- vs Laplace-distributed shocks and we explore the statistical properties of simulated time series. Our results cast doubts on whether RBC and NK models are able to provide a satisfactory representation of the transmission mechanisms linking exogenous shocks to macroeconomic dynamics.

Limited Asset Market Participation: Does it Really Matter for Monetary Policy?

We study the design of monetary policy in an economy characterized by staggered wage and price contracts together with limited asset market participation (LAMP). Contrary to previous results, we find that once nominal wage stickiness, an incontrovertible empirical fact, is considered: i) the Taylor Principle is restored as a necessary condition for equilibrium determinacy for any empirically plausible degree of LAMP; ii) the effect of LAMP for the design of optimal monetary policy are minor; iii) optimal interest rate rules become active no matter the degree of asset market participation. For this reasons we argue that LAMP does not matter much for monetary policy.