Existing estimates of the Federal Reserve’s implicit inflation target typically rely on the assumption that it is constant for the duration of the period of analysis. This paper relaxes this assumption and estimates the implicit inflation target using a time-varying parameter model and the Kalman filter. In applying this method to the Volcker–Greenspan period, it finds significant time variatio...

This study examines the expectational stability of the rational expectations equilibria (REE) under alternative Taylor rules when trend inflation is non-zero. We find that when trend inflation is high, the REE is likely to be expectationally unstable. This result holds true regardless of the nature of the data (such as contemporaneous data, forecast, and lagged data) introduced in the Taylor ru...

Evidence on the portfolio holdings and transaction patterns of households suggests that the burden of inflation is not evenly distributed. We build a monetary growth model consistent with key features of cross-sectional household data and use this framework to study the distributional impact of inflation. At the aggregate level, our model economy behaves similar to standard monetary growth mode...

We analyze a monetary model with flexible labor supply, cash-inadvance constraints, and seigniorageand tax-financed government spending. If the intertemporal elasticity of substitution of labor is greater than one, both determinate and indeterminate steady states exist. If the elasticity is less than one, there is a unique steady state, which can be indeterminate. Only in the latter case do the...

We examine the nonlinear one-step forward-looking model, in which the current state is a function of the (subjective) expected value of a nonlinear function of the state next period. Stationary Markov Sunspot Equilibria (SSEs) are known to exist near an indeterminate steady state, i.e. when the derivative of the function at the steady state is bigger than one in absolute value. We show that the...

Search Frictions on Product and Labor Markets: Money in the Matching Function This paper builds a macroeconomic model of equilibrium unemployment in which firms persistently face difficulties in selling their production and this affects their decisions to create jobs. Due to search-frictions on the product market, equilibrium unemployment is a U-shaped function of the ratio of total demand to t...

We investigate micro pricing behaviour in groceries (the UK’s most important consumer market) over eight years including the inflationary period of early 2008. We find behaviour sharply distinguished from most previous work, namely that overall basket prices rise but more individual prices fall than rise! This is consistent with retailers obscuring the fact of rising basket prices. We employ a ...

We examine the price dynamics in Indian cities using cointegration analysis. We identify and then calculate a common trend for prices in these 25 cities. We obtain the impulse response functions to calculate the rates of convergence to the prices, and find that the half-life of any shock is very small for Indian cities. Although a close to three-month half-life seems too fast, there are some in...

This paper extends the standard New Keynesian model by incorporating labor adjustment costs and overtime work. I show that labor frictions help reconcile the frequent price changes found in the microdata with the degree of sluggishness in inflation adjustment to output changes at the macro level. The introduction of labor frictions affects the dynamic behavior of economic variables (particularl...

This paper proposes a new panel model of cross-sectional dependence. The model has a number of potential structural interpretations that relate to economic phenomena such as herding in financial markets. On an econometric level, it provides a flexible approach of modelling interactions across panel units and can generate endogenous cross-sectional dependence that can resemble the dependence tha...