Implications of structural changes in the U.S. economy for pricing behavior and inflation dynamics

Some key features of the behavior of inflation in the United States appear to have changed in the past 20 years, with potentially important implications for forecasters and policymakers. Recent studies have provided evidence of a decline in both the variability and persistence of inflation. ; Such shifts in the behavior or dynamics of inflation would necessitate changes in the economic relationships used by policymakers and economists to assess current conditions, forecast key economic indicators, and determine the implications of policy changes for future economic activity. ; Willis examines how structural changes in the economy over the past two decades may have affected the price-setting behavior of firms and, in turn, the behavior of aggregate inflation. He concludes that structural changes in the economy over the past 20 years have likely contributed to a decrease in the persistence and volatility of inflation.Inflation (Finance) ; Prices

What impact will E-commerce have on the U.S. economy?

In recent years, e-commerce has emerged as the fastest growing sector of the U.S. marketplace. Despite the contraction in the high-tech industry during the recent recession, firms have continued to enter and expand their presence in e-commerce, and consumers have increased the number of purchases made online. E-commerce currently represents a very small share of overall commerce, but it is expected to continue to expand rapidly in coming years. As e-commerce grows, so will its impact on the overall economy. ; The primary route by which e-commerce will affect the economy at large is through its impact on productivity and inflation. Businesses and consumers that use e-commerce benefit from a reduction in costs in terms of the time and effort required to search for goods and services and to complete transactions. This reduction in costs results in higher productivity. An even larger increase in economy-wide productivity levels may result from productivity gains by firms not engaged in e-commerce as they respond to this new source of competition. Continued expansion of e-commerce may also lead to downward pressure on inflation through greater competition, cost savings, and changes in price-setting behavior of sellers. ; Willis examines the economic factors that have contributed to the rapid growth of e-commerce and assesses how the future growth of e-commerce may affect the overall economy. He concludes that if e-commerce continues to grow rapidly, it could lead to an increase in productivity growth and downward inflationary pressures that persist for several years.Electronic commerce ; Productivity

The economics of labor adjustment: mind the gap

We study inferences about the dynamics of labor adjustment obtained by the "gap methodology" of Caballero and Engel [1993] and Caballero, Engel and Haltiwanger [1997]. In that approach, the policy function for employment growth is assumed to depend on an unobservable gap between the target and current levels of employment. Using time series observations, these studies reject the partial adjustment model and find that aggregate employment dynamics depend on the cross-sectional distribution of employment gaps. Thus, nonlinear adjustment at the plant level appears to have aggregate implications. We argue that this conclusion is not justified: these findings of nonlinearities in time series data may reflect mismeasurement of the gaps rather than the aggregation of plant-level nonlinearities.Labor supply ; Econometric models

Mind the (approximation) gap: a robustness analysis

This note continues the discussion of the results reported by Ricardo Caballero and Eduardo Engel (1993), hereafter CE, and Ricardo Caballero, Eduardo Engel, and John Haltiwanger (1997), hereafter CEH, by responding to the results reported in Christian Bayer (2008). Russell Cooper and Jonathan Willis (2004), hereafter CW, find that the aggregate nonlinearities reported in CE and CEH may be the consequence of mismeasurement of the employment gap rather than nonlinearities in plant-level adjustment. Bayer reassesses this finding in the context of the CE model in the case where static employment gaps are observed and concludes that the CW result is not robust to alternative shock processes. We concur with Bayer's assessment that the nonlinearity finding is sensitive to the aggregate profitability shock process. We argue, however, that Bayer's finding does not imply that the mismeasurement problem goes away. Instead, the nonlinearity created by mismeasurement is directly related to the level of the aggregate shock. Once the empirical specification properly incorporates the aggregate shock, the nonlinearity test is robust to alternative shock processes and confirms the results in CW. More importantly, we demonstrate that the CW findings are robust to alternative shock processes for the natural case of unobserved gaps as examined by CE and CEH.

Coordination of expectations in the recent crisis: private actions and policy responses

Some of the events of the recent financial crisis have made clear the importance of expectations in an economy. The economic choices individuals make are often based on their expectations of what other people will do—in what economists call a “coordination game.” In such situations, changes in the beliefs of what others may do can affect the actions of individuals. A key element in such situations is that, as the collective beliefs change and individuals respond to these altered expectations, the outcome in the marketplace can change. In the recent crisis, the coordination of expectations played a key role in areas such as financial markets, the housing market, and the automobile sector. ; When the coordination of expectations results in a crisis or a panic, policymakers are the primary group with the ability to alter the expectations of individuals. By using various policy tools, policymakers can lessen the damage from the crisis. Such tools include providing guarantees and changing marketplace incentives such as interest rates and tax rates. ; Cooper and Willis develop a framework to illustrate how the coordination of expectations was instrumental in the economic and financial crisis. The framework also helps describe the actions policymakers took to limit the severity of the downturn by coordinating expectations to achieve more positive outcomes.

The Cost of Labor Adjustment: Inferences from the Gap

We study labor adjustment costs. We specify a dynamic optimization problem at the plant-level, allowing for both convex and non-convex adjustment costs. We estimate the parameters of the adjustment process using an indirect inference procedure in which simulated moments are matched with data moments. For this study we use estimates of reduced-form adjustment functions obtained by the gap methodology' reported in Caballero-Engel as data moments. Contrary to evidence at the micro level in support of non-convex adjustment costs, our findings indicate that piecewise quadratic adjustment costs are sufficient to match these aggregate moments.

Sticky information and sticky prices

In the U.S. and Europe, prices change somewhere between every six months and once a year. Yet nominal macro shocks seem to have real effects lasting well beyond a year. "Sticky information" models, as posited by Sims (2003), Woodford (2003), and Mankiw and Reis (2002), can reconcile micro flexibility with macro rigidity. We simulate a sticky information model in which price setters do not update their information on macro shocks as often as they update their information on micro shocks. Compared to a standard menu cost model, price changes in this model reflect older macro shocks. We then examine price changes in the micro data underlying the U.S. CPI. These price changes do not reflect older information, thereby exhibiting a similar response to that of the standard menu cost model. However, the empirical test hinges on staggered information updating across firms; it cannot distinguish between a full information model and a model where firms have equally old information.Prices

Euler-Equation Estimation for Discrete Choice Models: A Capital Accumulation Application

This paper studies capital adjustment at the establishment level. Our goal is to characterize capital adjustment costs, which are important for understanding both the dynamics of aggregate investment and the impact of various policies on capital accumulation. Our estimation strategy searches for parameters that minimize ex post errors in an Euler equation. This strategy is quite common in models for which adjustment occurs in each period. Here, we extend that logic to the estimation of parameters of dynamic optimization problems in which non-convexities lead to extended periods of investment inactivity. In doing so, we create a method to take into account censored observations stemming from intermittent investment. This methodology allows us to take the structural model directly to the data, avoiding time-consuming simulationbased methods. To study the effectiveness of this methodology, we first undertake several Monte Carlo exercises using data generated by the structural model. We then estimate capital adjustment costs for U.S. manufacturing establishments in two sectors.

Employment patterns during the recovery: Who are getting the jobs and why?

Employment gains during the recovery have differed sharply depending on workers' level of education, age, and gender. Workers with high levels of education, workers age 55 and older, and men have experienced the strongest employment gains in the recovery. ; Sahin and Willis analyze these employment patterns and find that the patterns appear to reflect two key factors: long-term trends and cyclical fluctuations. The strong employment growth for highly educated and older workers is a continuation of longer term shifts toward a more highly educated workforce and the aging of the baby boom generation. The employment gains for men are associated with men having a stronger cyclical attachment to the labor force when labor market conditions are weak. ; Employment and population patterns suggest that weak demand rather than a mismatch of workers and jobs is the primary explanation for the sluggish recovery. While highly educated workers have experienced the largest job gains, the demand for these workers has not kept pace with the growing population of highly educated workers. Regarding the skewed gains for men, evidence suggests that men are more likely to accept less desirable employment opportunities in periods of weak labor demand, signified by high unemployment and falling wages.

Dynamics of Labor Demand: Evidence from Plant-level Observations and Aggregate Implications

This paper studies the dynamics of labor demand at the plant and aggregate levels. The correlation of hours and employment growth is negative at the plant level and positive in aggregate time series. Further, hours and employment growth are about equally volatile at the plant level while hours growth is much less volatile than employment growth in the aggregate data. Given these differences, we specify and estimate the parameters of a plant-level dynamic optimization problem using simulated method of moments to match plant-level observations. Our findings indicate that non-convex adjustment costs are critical for explaining plant-level moments on hours and employment. Aggregation generates time series implications which are broadly consistent with observation. Further, we find that a model with quadratic adjustment costs alone can also broadly match the aggregate facts.