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Inflation Dynamics and Time-Varying Volatility: New Evidence and an Ss Interpretation

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  • Joseph Vavra

Abstract

Is monetary policy less effective at increasing real output during periods of high volatility than during normal times? In this article, I argue that greater volatility leads to an increase in aggregate price flexibility so that nominal stimulus mostly generates inflation rather than output growth. To do this, I construct price-setting models with "volatility shocks" and show these models match new facts in CPI micro data that standard price-setting models miss. I then show that these models imply that output responds less to nominal stimulus during times of high volatility. Furthermore, because volatility is countercyclical, this implies that nominal stimulus has smaller real effects during downturns. For example, the estimated output response to additional nominal stimulus in September 1995, a time of low volatility, is 55% larger than the response in October 2001, a time of high volatility. JEL Codes: E10, E30, E31, E50, D8. Copyright 2013, Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal The Quarterly Journal of Economics.

Volume (Year): 129 (2013)
Issue (Month): 1 ()
Pages: 215-258

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Handle: RePEc:oup:qjecon:v:129:y:2013:i:1:p:215-258

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Citations

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Cited by:
  1. Nicholas Bloom, 2014. "Fluctuations in Uncertainty," Journal of Economic Perspectives, American Economic Association, vol. 28(2), pages 153-76, Spring.
  2. Emmanuel De Veirman & Andrew Levin, 2014. "Cyclical changes in firm volatility," DNB Working Papers 408, Netherlands Central Bank, Research Department.
  3. Ruediger Bachmann & Benjamin Born & Steffen Elstner & Christian Grimme, 2013. "Time-Varying Business Volatility, Price Setting, and the Real Effects of Monetary Policy," NBER Working Papers 19180, National Bureau of Economic Research, Inc.
  4. Robert G. King & Alexander Wolman & Michael Dotsey, 2009. "Inflation and Real Activity with Firm Level Productivity Shocks," 2009 Meeting Papers 367, Society for Economic Dynamics.
  5. Silvana Tenreyro & Gregory Thwaites, 2013. "Pushing On a String: US Monetary Policy is Less Powerful in Recessions," CEP Discussion Papers dp1218, Centre for Economic Performance, LSE.
  6. Gabriel P. Mathy, 2014. "Uncertainty Shocks and Equity Return Jumps and Volatility During the Great Depression," Working Papers 2014-02, American University, Department of Economics.
  7. Matthias Kehrig & Nicolas Vincent, 2013. "Disentangling Labor Supply and Demand Shifts Using Spatial Wage Dispersion: The Case of Oil Price Shocks," Working Papers 13-57, Center for Economic Studies, U.S. Census Bureau.
  8. Joseph Vavra & David Berger, 2013. "Pass-through Across Products and Time," 2013 Meeting Papers 452, Society for Economic Dynamics.
  9. Ruediger Bachmann & Giuseppe Moscarini, 2011. "Business Cycles and Endogenous Uncertainty," 2011 Meeting Papers 36, Society for Economic Dynamics.
  10. Dixon, Huw & Seaton, Jonathan & Waterson, Michael, 2014. "Price Flexibility In British Supermarkets: Moderation And Recession," The Warwick Economics Research Paper Series (TWERPS) 1041, University of Warwick, Department of Economics.
  11. Fernando Alvarez & Hervé Le Bihan & Francesco Lippi, 2014. "Small and Large Price Changes and the Propagation of Monetary Shocks," NBER Working Papers 20155, National Bureau of Economic Research, Inc.
  12. Joseph S. Vavra, 2014. "Time-Varying Phillips Curves," NBER Working Papers 19790, National Bureau of Economic Research, Inc.

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