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Measuring changes in the value of the numeraire

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  • Mark W. Watson

    (Princeton University)

  • Ricardo Reis

    (Princeton University)

Abstract

This paper estimates a common component in many price series that has an equiproportional effect on all prices. Changes in this component can be interpreted as changes in the value of the numeraire since, by definition, they leave all relative prices unchanged. The first aim of the paper is to measure these changes. The paper provides a framework for identifying this component, suggests an estimator for the component based on a dynamic factor model, and assesses its performance relative to alternative estimators. Using 187 U.S. time-series on prices, we estimate changes in the value of the numeraire from 1960 to 2006, and further decompose these changes into a part that is related to relative price movements and a residual ‘exogenous’ part. The second aim of the paper is to use these estimates to investigate two economic questions. First, we show that the size of exogenous changes in the value of the numeraire helps distinguish between different theories of pricing, and that the U.S. evidence argues against several strict theories of nominal rigidities. Second, we find that changes in the value of the numeraire are significantly related to changes in real quantities, and discuss interpretations of this apparent non-neutrality.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 324.

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Date of creation: 2007
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Handle: RePEc:red:sed007:324

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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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  1. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
  2. Buiter, Willem H, 2007. "Is Numérairology the Future of Monetary Economics? Unbundling Numéraire and Medium of Exchange Through a Virtual Currency and a Shadow Exchange Rate," CEPR Discussion Papers 6099, C.E.P.R. Discussion Papers.
  3. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  4. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April.
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  6. N. Gregory Mankiw & Ricardo Reis, 2003. "What Measure of Inflation Should a Central Bank Target?," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1058-1086, 09.
  7. Carvalho Carlos, 2006. "Heterogeneity in Price Stickiness and the Real Effects of Monetary Shocks," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(3), pages 1-58, December.
  8. Susanto Basu & John G. Fernald, 1997. "Aggregate productivity and aggregate technology," International Finance Discussion Papers 593, Board of Governors of the Federal Reserve System (U.S.).
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  12. James H. Stock & Mark W. Watson, 2005. "Implications of Dynamic Factor Models for VAR Analysis," NBER Working Papers 11467, National Bureau of Economic Research, Inc.
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  15. Marlene Amstad & Simon Potter, 2009. "Real time underlying inflation gauges for monetary policymakers," Staff Reports 420, Federal Reserve Bank of New York.
  16. Felipe Schwartzman & Carlos Carvalho, 2008. "Heterogeneous Price Setting Behavior and Monetary Non-neutrality: Some General Results," 2008 Meeting Papers 1040, Society for Economic Dynamics.
  17. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 1999. "The Generalized Dynamic Factor Model: Identification and Estimation," CEPR Discussion Papers 2338, C.E.P.R. Discussion Papers.
  18. Ricardo Reis, 2005. "A Dynamic Measure of Inflation," NBER Working Papers 11746, National Bureau of Economic Research, Inc.
  19. Carlos Carvalho, 2005. "Heterogeneity in Price Setting and the Real Effects of Monetary Shocks," Macroeconomics 0509017, EconWPA, revised 12 Sep 2005.
  20. Anonymous, 1994. "Monetary Policy Statement, December 1994," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 57, December.
  21. Mirko Wiederholt, 2010. "rational inattention," The New Palgrave Dictionary of Economics, Palgrave Macmillan.
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Cited by:
  1. Dobrescu, Emilian, 2011. "Sectoral Structure and Economic Growth," Working Papers of Macroeconomic Modelling Seminar 112401, Institute for Economic Forecasting.
  2. Mark A. Wynne, 2008. "How should central banks define price stability?," Globalization and Monetary Policy Institute Working Paper 08, Federal Reserve Bank of Dallas.

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