I am an economist at the Bank of Canada in Model Development. 234 Wellington St. Ottawa Ontario K1A 0G9 E-mail: mjohnston@bankofcanada.ca Tel.: 613.782.8920 Curriculum Vitae |
At every knot, from the voices of public men to the vocabulary of dreams, language is close-woven with lies. Falsehood is inseparable from its generative life. Music can boast, it can sentimentalize, it can release springs of cruelty. But it does not lie. (Is there a lie, anywhere, in Mozart?) – George Steiner |
Real rigidities are an important feature of modern sticky price models and are policy-relevant because of their welfare consequences, but cannot be structurally identified from time series. I evaluate the plausibility of capital specificity as a source of real rigidities using micro evidence. Capital lumpiness reduces price stickiness as endogenous fluctuations in the marginal cost of output increase willingness to pay menu costs (an extensive effect), but increases price stickiness through complementarities (an intensive effect). The extensive effect warrants higher menu costs to match evidence on price changes, and the effects of complementarities prevail.
Macroeconomists are increasingly interested in higher order perturbation methods and their application to the solution of nonlinear rational expectations models. Our innovation is based on two ideas: (i) a rational expectations solution typically makes all variables depend on an infinite history of shocks, and (ii) this history is naturally suited to perturbation. The approach has several highly desirable features: (i) solutions are state space linear; (ii) it extends existing methods to accommodate state-dependent responses and endogenous time-varying uncertainty; (iii) the linear representation of a nonlinear approximation makes solutions obtainable quickly and easily; (iv) it provides a simple alternative to the proofs on approximations in Judd [1998] and Schmitt-Grohe and Uribe [2005] and simultaneously resolves some of the puzzling aspects of perturbation approximations discussed in the literature; and (v) results on third-order approximations are presented.
We question the orthodox view that sales are unimportant for understanding inflation. Through introduction of a new decomposition that analyzes inflation in terms of both inflation in permanent prices and cross-sectional changes in sale behavior, we show that at weekly periodicity changes in permanent prices accounts for as little as 60% of the variation in inflation. At lower frequencies (semiannual in our sample) the contributions of sales to inflation are negligible.