Search

We study the consequences of shocks to the household wealth distribution in dynamic general equilibrium by characterizing the rate at which excess wealth is depleted. Analytical results link the aggregate decumulation rate to the distribution of the additional balances, micro intertemporal marginal propensities to consume, and general equilibrium feedback. A quantitative heterogeneous agent New Keynesian model matches the depletion path of the excess savings built up during the COVID-19 pandemic across the income distribution. The model predicts a substantial but steadily waning boost to consumption and explains up to 40 percent of the surge in inflation observed in 2020 and 2021. [ABSTRACT FROM AUTHOR]

I introduce the "trimmed persistence PCE," a new measure of core inflation in which component prices are weighted according to the time-varying persistence of their price changes. The components of trimmed persistence personal consumption expenditures (PCE) display less tendency to mechanically pass-through the level of the prior period's inflation to the current period; thus, the impact of the current stance of monetary policy and real economic factors are more likely to be visible in recent trimmed persistence inflation compared to headline inflation. Trimmed persistence inflation performs comparably to existing popular measures of core inflation in terms of volatility and relationship with economic slack. Model selection procedures confirm trimmed persistence PCE contributes additional information to inflation forecasting models when stacked against other popular measures of core inflation. Applying the new index in a Taylor rule analysis suggests the Fed's aggressive path of federal funds rate hikes during the pandemic may have achieved appropriately restrictive levels by the fourth quarter of 2022, clearing the way for more measured policy adjustment thereafter as risks of policy overshooting became more salient. [ABSTRACT FROM AUTHOR]

We show that monetary policy affects homeownership decisions and argue that this effect is an important and overlooked channel of monetary policy transmission. We first document that monetary policy shocks are a substantial driver of fluctuations in the U.S. homeownership rate and that monetary policy affects households' housing tenure choices. We then develop and calibrate a two-agent New Keynesian model that can replicate the estimated transmission of monetary policy shocks to homeownership rates and housing rents. We find that the calibrated model provides an explanation to the "price puzzle" and delivers two important results with policy implications. First, the homeownership decision channel amplifies the redistributive effects of monetary policy, with contractionary shocks benefiting more outright homeowners and disadvantaging more renters and homeowners with a mortgage. Second, a monetary authority that reacts to a price index that includes housing rents generates excess house price, rents, and output volatility and larger real effects. [ABSTRACT FROM AUTHOR]

We propose System Projections with Instrumental Variables (SP-IV) to estimate dynamic structural relationships. SP-IV replaces lag sequences of instruments in traditional IV with lead sequences of endogenous variables. SP-IV allows the inclusion of controls to weaken exogeneity requirements, can be more efficient than IV with lags, and allows identification over many time horizons without creating many-weak-instruments problems. SP-IV also enables the estimation of structural relationships across impulse responses obtained from local projections or vector autoregressions. We provide a bias-based test for instrument strength, and inference procedures under strong and weak identification. SP-IV outperforms competing estimators of the Phillips Curve parameters in simulations. We estimate the Phillips Curve implied by the main business cycle shock of Angeletos et al. (2020), and find evidence for forward-looking behavior. The data is consistent with weak but also relatively strong cyclical connections between inflation and unemployment. [ABSTRACT FROM AUTHOR]

To better understand inflation expectations, we examine newly available data on U.S. households' inflation perceptions--what people think inflation has been in the past. The overarching summary is that inflation perceptions look similar to inflation expectations. The central tendencies of the responses for perceived inflation over the past five to ten years are similar to those of expected inflation for the next five to ten years, and all are a little above official estimates of inflation. Thus, survey respondents overall do not expect long-term inflation to change in the future relative to the recent past. Moreover, individuals who perceive higher inflation in the past tend to expect higher inflation in the future; people whose perceptions change tend to revise their expectations in the same direction; and perceptions and expectations vary similarly by gender and income. These results suggest that if inflation perceptions were to change, they could lead inflation expectations to change as well. [ABSTRACT FROM AUTHOR]

The Phillips curve has been much flatter in the past twenty years than in the preceding decades. We consider two hypotheses. One is that prices at the microeconomic level are stickier than they used to be|in the context of the canonical Calvo model, firms are adjusting prices less often. The other is that the expectations of firms and households about future inflation are now less well informed by macroeconomic conditions; because expectations are important in the setting of current-period prices, inflation is therefore less sensitive to macroeconomic conditions. To distinguish between our two hypotheses, we bring to bear information on inflation expectations from surveys, which allow us to distinguish changes in the sensitivity of inflation to economic conditions conditioning on expectations from changes in the sensitivity of expectations themselves to economic conditions. We find that, with some measures, expectations are less tied to economic conditions than in the past, and thus that this reduced attentiveness can account for a significant portion of the reduction in the sensitivity of inflation to economic conditions in recent decades. [ABSTRACT FROM AUTHOR]