Michael K. Johnston
Welcome
I am an economist at the Bank of Canada in the Model Development section.
Mail:
234 Wellington St.
Ottawa, Ontario K1A 0G9
Canada
E-mail: mjohnston@bankofcanada.ca
Tel.: 613.782.8920
Research
Straightforward approximate stochastic equilibria for nonlinear Rational Expectations models (with Robert G. King and Denny Lie; first version: May 2008, this version: December 2008) draft available on request
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.
Real and nominal frictions within the firm: How lumpy investment matters for price adjustment (First version: October 2007, this version: August 2008; in revision) draft
At the level of the firm or plant, both capital stocks and prices are typically changed infrequently. We describe a two-dimensional generalized (S,s) environment which replicates both of these facts, and use it to examine the implications of firm-specific factors for the dynamics of output and inflation. Established work on the interaction of real and nominal rigidities shows that the presence of firm-specific capital increases the persistence of inflation and the real effects of monetary shocks, by inducing firms to select smaller price adjustments than they would if capital was freely adjustable. In the two-dimensional generalized (S,s) model, installation costs lead to temporarily firm-specific capital, until the benefits to investment become large enough to warrant payment of installation costs. Capital depreciation and infrequent replacement purchases create endogenous fluctuations in marginal cost which increase firms' willingness to pay menu costs of price adjustment, and the sensitivity of real aggregates to nominal disturbances falls.
Should macroeconomists discount sales? (June 2007) draft
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.