Raphael Schoenle

International Menu Costs and Price Dynamics

In this paper, I analyze how the pricing behavior of firms systematically differs across domes- tic and export markets in terms of frequency, timing and size of price changes. First, I contrast domestic and export pricing decisions for the same products showing that (i) domestic producer prices change approximately twice as often as export producer prices, (ii) the probability of syn- chronized price adjustment across markets is 21% for upwards adjustments and 14% for downwards adjustments, (iii) the size of export price changes is substantially larger than the size of domes- tic price changes and (iv) there are strong seasonality effects in the data including a year-end synchronization effect. Second, I show that economic fundamentals such as inflation, productiv- ity, demand, exchange rates and market structure can only partially explain adjustment decisions and cross-market synchronization. Third, I present a dynamic menu cost model of price-setting, and attribute the remaining unexplained part in adjustment decisions to di erences in menu costs across countries. I calculate the implied export and domestic market menu costs from the data and estimate that export menu costs are 1.5% of period steady state revenues and three times as large as domestic market menu costs.

Is increased price flexibility stabilizing? Redux

We study the implications of increased price flexibility on output volatility. In a simple DSGE model, we show analytically that more flexible prices always amplify output volatility for supply shocks and also amplify output volatility for demand shocks if monetary policy does not respond strongly to inflation. More flexible prices often reduce welfare, even under optimal monetary policy if full efficiency cannot be attained. We estimate a medium-scale DSGE model using post-WWII U.S. data. In a counterfactual experiment we find that if prices and wages are fully flexible, the standard deviation of annualized output growth more than doubles.

Price rigidities and the granular origins of aggregate fluctuations

We study the aggregate implications of sectoral shocks in a multi-sector New Keynesian model featuring sectoral heterogeneity in price stickiness, sector size, and input-output linkages. We calibrate a 341 sector version of the model to the United States. Both theoretically and empirically, sectoral heterogeneity in price rigidity (i) generates sizable GDP volatility from sectoral shocks, (ii) amplifies both the “granular” and the “network” effects, (iii) alters the identity and relative contributions of the most important sectors for aggregate fluctuations, (iv) can change the sign of fluctuations, (v) invalidates the Hulten (1978) Theorem, and (vi) generates a “frictional” origin of aggregate fluctuations.

Multiproduct Firms and Price-Setting: Theory and Evidence from U.S. Producer Prices

In this paper, we establish three new facts about price-setting by multi-product firms and contribute a model that can explain our findings. Our findings have important implications for real effects of nominal shocks and provide guidance for how to model pricing decisions of firms. On the empirical side, using micro-data on U.S. producer prices, we first show that firms selling more goods adjust their prices more frequently but on average by smaller amounts. Moreover, the higher the number of goods, the lower is the fraction of positive price changes and the more dispersed the distribution of price changes. Second, we document substantial synchronization of price changes within firms across products and show that synchronization plays a dominant role in explaining pricing dynamics. Third, we find that within-firm synchronization of price changes increases as the number of goods increases. On the theoretical side, we present a state-dependent pricing model where multi-product firms face both aggregate and idiosyncratic shocks. When we allow for firm-specific menu costs and trend inflation, the model matches the empirical findings.

YOLO: Mortality Beliefs and Household Finance Puzzles

Subjective mortality beliefs a ect pre- and post-retirement consumption and savings decisions, as well as portfolio allocation. New survey evidence shows that individuals overestimate their mortality at short horizons and survival rate at long horizons. For example, a 28 year old male with a 99.4% chance of surviving beyond 5 years believes he will do so with 92.8% probability. A 68 year old with a 71.4% probability of living to 78, believes he has a 82.4% chance of living that long. The formation of these beliefs across age cohorts can be attributed to overweighting the most salient causes-of-death, which change over the life-cycle. This bias matters empirically: Survival expectations correlate with heterogeneity in nancial education and investment behavior. Embedded in a run-of-the-mill life-cycle model, these beliefs cause the young to under-save (they have 10% less saved upon retirement) and retirees to not fully draw down their assets (they consume 12% less during retirement). In addition, for reasonable levels of risk- tolerance, the required excess rate of return on equity is in line with historical averages once subjective beliefs are accounted for.This paper introduces the emergent concept of subjective life-expectancies into the discussion of life-cycle consumption, savings, and portfolio choice. We present new evidence that individuals overestimate their mortality at short horizons and rate of survival at long horizons. For example, a 28 year old male with a 99.4% chance of surviving beyond 5 years believes he will do so with 92.8% probability. A 68 year old with a 71.4% probability of living to 78, believes he has a 82.4% chance of living that long. These findings provide the basis for a unified, empirically grounded explanation for seemingly disconnected puzzles. Relative to a benchmark life-cycle model, these expectation errors generate over-consumption and under-saving when young, and underconsumption during retirement. In addition, for reasonable levels of risk-tolerance, the required excess rate of return on equity is not too high once subjective beliefs are accounted for. ∗Heimer is at the Federal Reserve Bank of Cleveland, Myrseth is at University of St. Andrews, and Schoenle is at Brandeis University. Heimer can be contacted at: rawley.heimer@researchfed.org. The views in this article do not necessarily reflect those of the Federal Reserve System or the Board of Governors. 1