IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

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

  • Joseph S. Vavra

Is monetary policy less effective at increasing real output during periods of high volatility than during normal times? In this paper, 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 output responds less to nominal stimulus during times of high volatility. Furthermore, since 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 percent larger than the response in October 2001, a time of high volatility.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.nber.org/papers/w19148.pdf
Download Restriction: no

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19148.

as
in new window

Length:
Date of creation: Jun 2013
Publication status: published as Joseph Vavra, 2013. "Inflation Dynamics and Time-Varying Volatility: New Evidence and an Ss Interpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 129(1), pages 215-258.
Handle: RePEc:nbr:nberwo:19148
Note: ME
Contact details of provider: Postal:
National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.

Phone: 617-868-3900
Web page: http://www.nber.org
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Aubhik Khan & Julia K. Thomas, 2004. "Idiosyncratic shocks and the role of nonconvexities in plant and aggregate investment dynamics," Staff Report 352, Federal Reserve Bank of Minneapolis.
  2. Caballero, Ricardo J, 1993. "Durable Goods: An Explanation for Their Slow Adjustment," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 351-384, April.
  3. Guimarães, Bernardo & Sheedy, Kevin D., 2008. "Sales and Monetary Policy," CEPR Discussion Papers 6940, C.E.P.R. Discussion Papers.
  4. Giuseppe Bertola & Ricardo J. Caballero, 1990. "Kinked Adjustment Costs and Aggregate Dynamics," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 237-296 National Bureau of Economic Research, Inc.
  5. David Berger & Joseph Vavra, 2015. "Dynamics of the U.S. Price Distribution," NBER Working Papers 21732, National Bureau of Economic Research, Inc.
  6. R?diger Bachmann & Christian Bayer, 2014. "Investment Dispersion and the Business Cycle," American Economic Review, American Economic Association, vol. 104(4), pages 1392-1416, April.
  7. Mark Bils, 2009. "Do Higher Prices for New Goods Reflect Quality Growth or Inflation?," The Quarterly Journal of Economics, Oxford University Press, vol. 124(2), pages 637-675.
  8. Virgiliu Midrigan, 2011. "Menu Costs, Multiproduct Firms, and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 79(4), pages 1139-1180, 07.
  9. Fernando E. Alvarez & Francesco Lippi, 2012. "Price Setting with menu cost for Multi-product firms," NBER Working Papers 17923, National Bureau of Economic Research, Inc.
  10. Nicholas Bloom & Max Floetotto & Nir Jaimovich & Itay Saporta-Eksten & Stephen J. Terry, 2014. "Really Uncertain Business Cycles," Working Papers 14-18, Center for Economic Studies, U.S. Census Bureau.
  11. Andrew C. Caplin & Daniel F. Spulber, 1987. "Menu Costs and the Neutrality of Money," NBER Working Papers 2311, National Bureau of Economic Research, Inc.
  12. Robert J. Barro, 1972. "A Theory of Monopolistic Price Adjustment," Review of Economic Studies, Oxford University Press, vol. 39(1), pages 17-26.
  13. Krusell, P & Smith Jr, A-A, 1995. "Income and Wealth Heterogeneity in the Macroeconomic," RCER Working Papers 399, University of Rochester - Center for Economic Research (RCER).
  14. Mikhail Golosov & Robert E. Lucas Jr., 2007. "Menu Costs and Phillips Curves," Journal of Political Economy, University of Chicago Press, vol. 115, pages 171-199.
  15. Rüdiger Bachmann & Christian Bayer, 2011. "Uncertainty Business Cycles - Really?," NBER Working Papers 16862, National Bureau of Economic Research, Inc.
  16. Ruediger Bachmann & Christian Bayer, 2009. "Firm-Specific Productivity Risk over the Business Cycle: Facts and Aggregate Implications," 2009 Meeting Papers 869, Society for Economic Dynamics.
  17. Den Haan, Wouter J., 2010. "Assessing the accuracy of the aggregate law of motion in models with heterogeneous agents," Journal of Economic Dynamics and Control, Elsevier, vol. 34(1), pages 79-99, January.
  18. Woodford, Michael, 2009. "Information-constrained state-dependent pricing," Journal of Monetary Economics, Elsevier, vol. 56(S), pages S100-S124.
  19. David Amirault & Carolyn Kwan & Gordon Wilkinson, 2006. "Survey of Price-Setting Behaviour of Canadian Companies," Staff Working Papers 06-35, Bank of Canada.
  20. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
  21. John Hassler, . "Variations in Risk and Fluctuations in Demand - a theoretical model," Homapage Papers _003, Stockholm University, Institute for International Economic Studies.
  22. Fernando E. Alvarez & Francesco Lippi & Luigi Paciello, 2010. "Optimal price setting with observation and menu costs," NBER Working Papers 15852, National Bureau of Economic Research, Inc.
  23. Giorgio Primiceri & Alejandro Justiniano, 2006. "The Time Varying Volatility of Macroeconomic Fluctuations," 2006 Meeting Papers 353, Society for Economic Dynamics.
  24. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, Oxford University Press, vol. 123(4), pages 1415-1464.
  25. Martin Eichenbaum & Nir Jaimovich & Sergio Rebelo, 2011. "Reference Prices, Costs, and Nominal Rigidities," American Economic Review, American Economic Association, vol. 101(1), pages 234-262, February.
  26. Mark Gertler & John Leahy, 2006. "A Phillips Curve with an Ss Foundation," NBER Working Papers 11971, National Bureau of Economic Research, Inc.
  27. Dixit, Avinash, 1991. "A simplified treatment of the theory of optimal regulation of Brownian motion," Journal of Economic Dynamics and Control, Elsevier, vol. 15(4), pages 657-673, October.
  28. Simon Gilchrist & Jae W. Sim & Egon Zakrajšek, 2014. "Uncertainty, Financial Frictions, and Investment Dynamics," NBER Working Papers 20038, National Bureau of Economic Research, Inc.
  29. R?diger Bachmann & Ricardo J. Caballero & Eduardo M. R. A. Engel, 2013. "Aggregate Implications of Lumpy Investment: New Evidence and a DSGE Model," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(4), pages 29-67, October.
  30. Avinash Dixit, 1991. "Analytical Approximations in Models of Hysteresis," Review of Economic Studies, Oxford University Press, vol. 58(1), pages 141-151.
  31. Michael Dotsey & Robert G. King & Alexander L. Wolman, 1999. "State-Dependent Pricing and the General Equilibrium Dynamics of Money and Output," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 655-690.
  32. Patrick J. Kehoe & Virgiliu Midrigan, 2008. "Temporary price changes and the real effects of monetary policy," Working Papers 661, Federal Reserve Bank of Minneapolis.
  33. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, 05.
  34. Emi Nakamura & Jón Steinsson, 2008. "Monetary Non-Neutrality in a Multi-Sector Menu Cost Model," NBER Working Papers 14001, National Bureau of Economic Research, Inc.
  35. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
  36. Richard A. Ashley & Randall J. Verbrugge., 2006. "Mis-Specification in Phillips Curve Regressions: Quantifying Frequency Dependence in This Relationship While Allowing for Feedback," Working Papers e06-11, Virginia Polytechnic Institute and State University, Department of Economics.
  37. Mark J. Zbaracki & Mark Ritson & Daniel Levy & Shantanu Dutta & Mark Bergen, 2004. "Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets," The Review of Economics and Statistics, MIT Press, vol. 86(2), pages 514-533, May.
  38. Peter J. Klenow & Oleksiy Kryvtsov, 2005. "State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation?," Staff Working Papers 05-4, Bank of Canada.
  39. Leif Danziger, 1999. "A Dynamic Economy with Costly Price Adjustments," American Economic Review, American Economic Association, vol. 89(4), pages 878-901, September.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:19148. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.