Working Papers
Dynamic Pricing under Information Frictions: Evidence from Firm-level Subjective Expectations, with J. Tielens (Job Market Paper)
This paper provides evidence and theory for the dynamic pricing behavior of firms. We construct a novel dataset by combining almost three decades of monthly microdata on prices and costs for the Belgian manufacturing sector with survey data on subjective price expectations. We develop a tractable model of price setting that allows for real, nominal, and information rigidities. We derive a novel empirical specification from primitives and an identification strategy that permits estimating the degrees of each rigidity from the intertemporal co-movements of prices, costs, and expectations. Consistent with a “present bias” in pricing behavior, our estimates indicate that firms respond to unanticipated nominal cost shocks by about 20-30% less than a benchmark New-Keynesian model with complete information. We then show empirically that the dynamic pass-through from costs to prices is non-linear, and provide rationalization for the evidence via a state-dependent information friction. In the model, as firms update their beliefs faster in response to a nominal cost shock, the pass-through increases with the magnitude of shocks. At the aggregate level, our findings imply a “high discounting” and a non-linear Phillips curve, which we characterize analytically. High discounting and nonlinearities lead to a correlation between inflation and higher-order moments of the price distribution, consistent with the evidence that we provide on the mechanism. Finally, we assess the performance of the model in explaining aggregate inflation volatility. We show that the model can account for 63% of the volatility of inflation, as opposed to 50% of the full-information benchmark. We conclude from the exercise that, in our framework, incomplete information reduces monetary non-neutrality.
Micro and Macro Cost-price Dynamics during inflation surges versus normal times, with M. Gertler, S. Lenzu, J. Tielens
We use microdata on firms’ prices and production costs to study inflation dynamics in high- and low-inflation environments. We document that prices are set in a state-dependent way. Both the probability of a firm adjusting its price and the magnitude of such adjustments are functions of the firm’s price gap–the percentage difference between a firm’s ideal and current price. We then develop a generalized state-dependent pricing model to account for Belgian PPI inflation over the period 1999:Q1 to 2023:Q4. Conditional on a path of cost shocks extracted from the data, the model explains both the low and stable inflation of the pre-pandemic period as well as the pandemic era surge. In normal times, the adjustment probabilities are approximately constant and the model resembles a framework with time-dependent pricing as in Calvo (1983). During the surge, the model captures the rise in inflation along with the change in the price adjustment frequency, which is the driver of the nonlinear dynamics.
Anatomy of the Phillips Curve: Micro Evidence and Macro Implications, with M. Gertler, S. Lenzu, J. Tielens
R&R American Economic Review
We develop a bottom-up approach to estimating the slope of the primitive form of the New Keynesian Phillips curve, which features marginal cost as the relevant real activity variable. Using quarterly micro data on prices, costs, and output from the Belgian manufacturing sector, we estimate dynamic pass-through regressions that identify the degrees of nominal and real rigidities in price setting. Our estimates imply a high slope for the marginal cost-based Phillips curve, which contrasts with the low estimates of the conventional unemployment or output-based formulations in the literature. We reconcile the difference by demonstrating that, although the pass-through of marginal cost into inflation is substantial, the elasticity of marginal cost with respect to the output gap is low, at least for pre-pandemic data. We also illustrate the advantage of a marginal cost-based Phillips curve for characterizing the transmission of supply shocks to inflation.
Oil Prices, Monetary Policy and Inflation Surges, with M. Gertler
We develop a simple quantitative New Keynesian model aimed at analyzing how the reaction of monetary policy contributed to the recent rise and fall in inflation. The model includes several shocks but features oil price shocks for two reasons: (i) energy prices have been among the central factors in discussions about the surge; (ii) we can use identified oil shocks along with monetary shocks to estimate and discipline the model. We then employ the estimated framework to recover shocks without targeting inflation. Overall the model accounts for roughly three fourths of the surge in PCE inflation. Both the oil shocks and the shocks to policy accommodation played important roles in the inflation rise. Moreover, the easing of oil prices and subsequent shift to policy tightening contributed to the decline. A nonmonetary demand shock (a composite of private demand and fiscal stimulus) also contributed to inflation starting in 2022.
Liquidity and Fundamental Risks in a Search Economy
This paper studies the interplay between liquidity and fundamental risks in an asset pricing framework with a frictional, decentralized secondary market and endogenous trading decisions. In this setting, the liquidity value of assets decreases in the riskiness of the underlying. For a sufficiently large deterioration of fundamentals, agents stop trading the asset, leading to a freeze of the secondary market and flight-to-safety behavior. This mechanism implies a novel type of monetary “safe-trade” equilibrium, in which assets are traded if and only if safe. Liquidity feeds back into the default decision of the issuing firm, potentially leading to price spirals and a multiplicity of equity valuations and default thresholds.
Monetary Policy and Sovereign Risk, with L. Braccini
This paper estimates the effects of monetary policy on sovereign risk. We use proprietary intraday credit default swap (CDS) data on five European countries and identify the effects of monetary policy on CDS premia in a small time window around the European Central Bank (ECB) monetary policy announcements. We construct monetary policy surprises for the press release and conference windows separately and show that there are two channels with effects of opposite sign. We then use stock price surprises to disentangle and interpret the two effects in terms of a standard monetary policy channel, in which CDS premia and interest rates co-move positively, and an information channel, in which they co-move negatively. We find that the information channel is quantitatively the most important. The results are robust across samples, maturities of CDS, and model specifications.
A benevolent planner chooses optimally whether and how to disclose publicly a private forecast of fundamentals to a large number of informed small agents. These agents interact in economic environments with information frictions, strategic complementarity or substitutability in actions, and a rich set of externalities that are responsible for inefficient fundamental and non-fundamental fluctuations. First, I characterize the optimal policy as a function of the externalities of the economy, the quality of the forecast of the planner, and agents’ prior uncertainty. Next, I discuss and interpret the theoretical results within the context of an application to central bank communication.
Work in progress
Granular Identification of Vector Autoregression Models, with H. Han, and Y. Selvakumar.
A Closed-form Solution of Menu Cost Pricing Models for Monetary Policy Analysis, with A. Esbim, M. Gertler, S. Lenzu, and J. Tielens.