Technology Shocks and Monetary Policy in an Estimated Sticky Price Model of the Euro Area.

In this paper, we seek to characterize the dynamic effects of permanent technology shocks and the way in which European monetary authorities reacted to these shocks over the past two decades. To do so, we develop an augmented sticky price-sticky wage model of the business cycle, which is estimated by minimizing the distance between theoretical, dynamic responses of key variables to a permanent technology shock and their structural VAR counterparts. In a second step, we conduct a counterfactual experiment consisting to compare these responses with the outcome of the optimal monetary policy. A significant discrepancy emerges between these responses, suggesting the European monetary authorities might not have responded optimally to permanent technology shocks.Sticky prices and wages ; Taylor rule ; Optimal monetary policy.

Productivity and stock prices.

This study looks at the degree of correlation between stock prices and productivity at different levels, i.e. analysis of the correlations between certain components of the two variables and how correlations vary according to the different frequencies characterising these variables. It should be acknowledged that the approach used is only designed to isolate the stylised facts related to the cyclical components of the variables under review and not to explain them. In particular, the method chosen cannot be used to make forecasts or to provide a refi ned economic interpretation of these stylised facts. Nonetheless, this analysis, applied to the United States and the euro area over the period 1973(1)-1985(4), highlights the following points: • in the United States, an increase (or reduction) in the cyclical component of the rate of stock returns is positively correlated with current or future increases (or reductions) in that of the productivity growth rate; • in the euro area, this correlation is less strong. It appears, for example, that a sharp fall in stock prices precedes a marked decline in productivity (link between stock prices and future productivity) and, as a result, in profi ts. This fall could then be interpreted as a normal, even desirable, adjustment mechanism for asset prices. Correspondingly, a sharp rise in stock prices should not automatically be interpreted as the emergence of a future bubble given that such rises appear to foreshadow an increase in productivity and therefore in profi ts. Over the most recent period 1986(1)-2002(4), these correlations appear less pronounced, thus indicating a possible break. Our result is robust given that two complementary methods corroborate it and that it is similar to Estrella’s (2003) findings for the United States. This pattern appears to suggest that the cyclical component of stock prices is in phase with that of productivity.

Price Stickiness and Sectoral Inflation Persistence: Additional Evidence

In this paper, using US as well as French sectoral data and indicators of price rigidity, we re-examine the (lack of) relation between price stickiness and inflation persistence. This has recently been put forward by Bils and Klenow (2004) as evidence against time-dependent price setting models. We obtain that, when filtering out sector-specific shocks along the lines of Boivin et al. (2009), and allowing for an alternative assumption on the marginal cost process, the case against the time-dependent Calvo model is substantially weakened.Sticky prices, Heterogeneity, Inflation persistence.

The Dynamic Effects of Disinflation Policies.

This paper investigates the effects of disinflation policies on key macroeconomic variables. Using postwar US data and episode techniques, we identify disinflation shocks as shocks that drive the inflation rate to a lower level in the long-run. We find that in the immediate aftermath of a disinflation policy, the economy enters in a persistent recession. The inflation rate increases above its long-run level and exhibits a positive hump-shaped response. A similar pattern is found for the nominal interest rate, which responds even more strongly in the short-run. We then show that the standard new Keynesian model fails to account for macroeconomic dynamics in disinflationary times. On the contrary a deep habit version of the model successfully accounts for the effects of disinflation policies.Disinflation policies ; Deep Habits ; New Keynesian Models.