Stephen G. Cecchetti

The frequency of price adjustment: A study of the newsstand prices of magazines

Abstract Data on the newsstand prices of American magazines is used to investigate the determinants of the frequency of nominal price change. Magazine price changes, often coming after real prices have fallen by one quarter, provide strong evidence for monopolistic sticky price models. The data is examined by applying a fixed effects logit specification to the price change rule implied by a target-threshold model of a firm facing general price inflation, an uncertain future and costly nominal adjustment. The essay concludes that higher inflation leads to more frequent price adjustment and that the real cost of price changes varies with the size of a real price change.

Estimation of the optimal futures hedge

Standard approaches to designing a futures hedge often suffer from two major problems. First, they focus only on minimizing risk, so no account is taken of the impact on expected return. Second , in estima ting the hedge ratio, no allowance is made for time variation in the distribution of cash and futures price changes. This paper describes a technique for estimating the optimal futures hedge that corrects these problems and illustrates its use in hedging Treasury bonds with T-bond futures. Copyright 1988 by MIT Press.

The equity premium and the risk-free rate : Matching the moments

This paper investigates the ability of a representative agent model with time separable utility to explain the mean vector and the covariance matrix of the risk free interest rate and the return to leveraged equity in the stock market. The paper generalizes the standard calibration methodology by accounting for the uncertainty in both the sample moments to be explained and the estimated parameters to which the model is calibrated. We develop a testing framework to evaluate the models ability to match the moments of the data. We study two forms of the model, both of which treat leverage in a manner consistent with the data. In the first, dividends explicitly represent the flow that accrues to the owner of the equity, and they are discounted by the marginal rate of intertemporal substitution defined over consumption. The second form of the model introduces bonds and treats equities as the residual claim to the total endowment stream. We find that the first moments of the data can be matched for a wide range of preference parameter values. But for both models the implied first and second moments taken together are always statistically significantly different from the data at standard levels. This last result contrasts sharply with other recent treatments of leverage in the literature.

The Future of Public Debt: Prospects and Implications

Since the start of the financial crisis, industrial country public debt levels have increased dramatically. And they are set to continue rising for the foreseeable future. A number of countries face the prospect of large and rising future costs related to the ageing of their populations. In this paper, we examine what current fiscal policy and expected future age-related spending imply for the path of debt/GDP ratios over the next several decades. Our projections of public debt ratios lead us to conclude that the path pursued by fiscal authorities in a number of industrial countries is unsustainable. Drastic measures are necessary to check the rapid growth of current and future liabilities of governments and reduce their adverse consequences for long-term growth and monetary stability.

Inflation Indicators and Inflation Policy

In recent years, policymakers throughout the world have advocated that monetary policy shift toward inflation targeting. Recent actions in the United States serve to highlight the desire of the Federal Reserve to keep inflation both low and stable, while downplaying the likely output and employment consequences. But control of inflation requires both that one be able to forecast its future path, and that one have estimates of what impact policy changes have on that path. Unfortunately, inflation is very difficult to forecast even at very near horizons. This is true because the relationship of candidate inflation indicators to inflation is neither very strong nor very stable. Beyond this, the relationship between monetary policy instruments, such as the federal funds rate, and inflation also varies substantially over time and cannot be estimated precisely. Construction of policy rules must take these difficulties into account. Several rules are examined, and they have the following interesting properties. First, since prices take time to respond to all types of impulses, the federal funds rate should be raised immediately following a shock. One should not wait for prices to rise before acting. Finally, comparison of the results of price-level targeting with nominal-income targeting suggest that the difficulties inherent in forecasting and controlling the former provide an argument for focusing on the latter.

Policymakers’ Revealed Preferences and the Output–Inflation Variability Trade–off: Implications for the European System of Central Banks

This paper explores two aspects of the conduct of monetary policy under a monetary union. First, even if the preferences of policymakers over inflation and output variability are identical across member countries, differences in economic structure will mean different desired policy responses to even a common shock. Second, policymakers may be forced to make important concessions in their preferences over inflation and output variability. To examine these issues, in this paper we estimate the objective functions that the European national central banks were implicitly maximizing over the 15 or so years prior to monetary union, as well as the slopes of the inflation-output variability trade-off in each country. While the slopes of the trade-offs vary dramatically across countries, the objective functions are quite similar, with most countries having weights in excess of three-quarters on inflation variability and less than one-quarter on output variability. Our findings suggest that the concessions (in terms of preferences over output and inflation variability) that current inflation-targeting countries such as the UK and Sweden would have to make on accession to the European Monetary Union (EMU) are likely to be minimal. On the other hand, the differences in economic structure across the Eurosystem countries might make it difficult to formulate a common policy even in the face of common goals, suggesting that there may still be significant costs to joining for countries currently outside the EMU.

Variance-Ratio Tests: Small-Sample Properties With an Application to International Output Data

Two aspects of statistical inference using variance-ratio statistics are studied, (1) the accuracy of asymptotic approximations in small samples and (2) the size distortion arising from searching over many horizons in deciding whether to reject a model. A joint test combining variance-ratio statistics at various horizons is proposed, and a Monte Carlo procedure for conducting exact inference is provided. The real output data of nine countries are used to discuss these issues.

Sources of Output Fluctuations During the Interwar Period: Further Evidence on the Causes of the Great Depression

This paper decomposes output fluctuations during the 1913 to 1940 period into components resulting from aggregate supply and aggregate demand shocks. We estimates a number of different models, all of which yield qualitatively similar results. While identification is normally achieved by assuming that aggregate demand shocks have no long run real effects, we also estimate models that allow demand shocks to permanently affect output. Our findings support the following three conclusions: (i) there was a large negative aggregate demand shock in November 1929, immediately after the stock market crash; (ii) aggregate demand shocks are mainly responsible for the decline in output through mid to late 1931; (iii) beginning in mid 1931 there is an aggregate supply collapse that coincides with the onset on severe bank panics.

Structural Estimates of the U.S. Sacrifice Ratio

This article investigates the statistical properties of the U.S. sacrifice ratio—the cumulative output loss arising from a permanent reduction in inflation. We derive estimates of the sacrifice ratio from three structural vector autoregression models and then conduct a series of simulation exercises to analyze their sampling distribution. We obtain point estimates of the sacrifice ratio that are consistent with results reported in earlier studies. However, the estimates are very imprecise, which we suggest reflects the poor quality of instruments used in estimation. We conclude that the estimates provide a very unreliable guide for assessing the output cost of disinflation policy.

The Brave new World of Central Banking

At the dawn of the 21st century, property and equity ownership are spread more broadly across the population than they once were. One consequence of this is that asset price booms and crashes now have a direct impact on general welfare. The fact that bubbles distort nearly all economic decisions gives policymakers a stronger interest in asset price stability. In this article I examine the theoretical and empirical case for the existence of equity and property bubbles, and then summarise the economic distortions that they create. The evidence suggests increasing our attention to property prices. I go on to discuss the possible policy responses, including examining the consequences of changing the way in which housing is included in standard aggregate price measures.