Stephen J. Terry

Time Variation in the Inflation Passthrough of Energy Prices

From Bayesian estimates of a vector autoregression (VAR) which allows for both coefficient drift and stochastic volatility, we obtain the following three results. First, beginning in approximately 1975, the responsiveness of core inflation to changes in energy prices in the United States fell rapidly and remains muted. Second, this decline in the passthrough of energy inflation to core prices has been sustained through a recent period of markedly higher volatility of shocks to energy inflation. Finally, reduced energy inflation passthrough has persisted in the face of monetary policy which quickly became less responsive to energy inflation starting around 1985.

Markov-chain approximations of vector autoregressions: application of general multivariate-normal integration techniques

Discrete Markov chains can be useful to approximate vector autoregressive processes for economists doing computational work. One such approximation method first presented by Tauchen (1986) operates under the general theoretical assumption of a transformed VAR with diagonal covariance structure for the process error term. We demonstrate one simple method of more conveniently treating this approximation problem in practice using readily available multivariate-normal integration techniques to allow for arbitrary positive-semidefinite covariance structures. Examples are provided using processes with non-diagonal and singular non-diagonal error covariances.

Really Uncertain Business Cycles

We investigate the role of uncertainty in business cycles. First, we demonstrate that microeconomic uncertainty rises sharply during recessions, including during the Great Recession of 2007–2009. Second, we show that uncertainty shocks can generate drops in gross domestic product of around 2.5% in a dynamic stochastic general equilibrium model with heterogeneous firms. However, we also find that uncertainty shocks need to be supplemented by first†moment shocks to fit consumption over the cycle. So our data and simulations suggest recessions are best modelled as being driven by shocks with a negative first moment and a positive second moment. Finally, we show that increased uncertainty can make first†moment policies, like wage subsidies, temporarily less effective because firms become more cautious in responding to price changes.

Wage Elasticities in Working and Volunteering: The Role of Reference Points in a Laboratory Study

Volunteer behavior comprises a large source of both informal and formal labor in the United States, yet volunteer effort is often unresponsive to traditional incentives. To investigate the sources of this unresponsiveness, we appeal to a classic explanation: targeting behavior. In particular, we provide a laboratory test of effort response to changes in wages, either accrued to individuals or to a charity, in the presence of expectations-based reference points or targets. When individuals earn money for themselves, higher wages lead to higher effort with relatively muted targeting behavior. When individuals earn money for a charity, higher wages instead lead to lower effort with substantial targeting behavior. Results from an additional study highlight the potentially important role selection may play in this latter adverse response. For managers contemplating the use of performance goals or targets to encourage more volunteer effort, our results suggest careful consideration about the extent to which they may render other incentives less effective.