This paper shows that the importance of lagged in∞ation rates in the Phillips curve is compatible... more This paper shows that the importance of lagged in∞ation rates in the Phillips curve is compatible with a model of time-dependent price sticki- ness. The conventional interpretation of a signiflcant coe-cient on lagged in∞ation as a deviation from optimizing behaviour may therefore be mis- leading. In∞ation persistence is introduced by relaxing the Calvo assump- tion that the probability of price adjustment is constant, in favour of the more plausible case where it increases with the duration of the adjustment lag. This generalized Calvo model provides a good description of in∞a- tion dynamics without the need to introduce any backwards-looking flrms. The paper then shows the policy implications drawn from the Calvo model may be robust to mis-speciflcation of the probability of price adjustment.
This paper analyses Labour’s record on monetary policy and the record of the MPC which it created... more This paper analyses Labour’s record on monetary policy and the record of the MPC which it created. The paper begins by discussing the conceptual framework and institutions behind inflation targeting as it operates in the UK. We then discuss the successes that it enjoyed up to 2007 and debate the lessons that are being learned as a consequence of the experience since then. We then raise some of the formidable challenges that UK monetary policy must now face up to including maintaining the credibility of the inflation targeting regime in the face of greater interdependence between monetary and fiscal policy, and between monetary policy and support to the banking system and financial markets.
We extend a standard New Keynesian model both to incorporate heterogeneity in spending opportunit... more We extend a standard New Keynesian model both to incorporate heterogeneity in spending opportunities along with two sources of (potentially time-varying) credit spreads and to allow a role for the central bank's balance sheet in determining equilibrium. We use the model to investigate the implications of imperfect financial intermediation for familiar monetary policy prescriptions and to consider additional dimensions of central bank policy-variations in the size and composition of the central bank's balance sheet as well as payment of interest on reserves-alongside the traditional question of the proper operating target for an overnight policy rate. We also study the special problems that arise when the zero lower bound for the policy rate is reached. We show that it is possible to provide criteria for the choice of policy along each of these possible dimensions within a single unified framework, and to achieve policy prescriptions that apply equally well regardless of whether financial markets work efficiently or not and regardless of whether the zero bound on nominal interest rates is reached or not.
A striking fact about pricing is the prevalence of "sales": large temporary price cuts ... more A striking fact about pricing is the prevalence of "sales": large temporary price cuts followed by prices returning to exactly their former levels. This paper builds a macroeconomic model with a rationale for sales based on firms facing customers with different price sensitivities. Even if firms can adjust sales without cost, monetary policy has large real effects owing to sales being strategic substitutes: a firm's incentive to have a sale is decreasing in the number of other firms having sales. Thus the flexibility seen in individual prices due to sales does not translate into flexibility of the aggregate price level. (JEL E13, E31, E52, L11, L25, L81, M31)
Economic development requires some limits on what those in power can do — the rule of law — but h... more Economic development requires some limits on what those in power can do — the rule of law — but how can restraints be imposed on the powerful when there is no-one above them? This paper studies equilibrium rules allocating power and resources established by selfinterested incumbents under the threat of rebellions from inside and outside the group in power. Commitment to uphold individuals’ rights can only be achieved if power is not as concentrated as incumbents would like it to be, ex post. Power sharing endogenously enables incumbents to commit to otherwise time-inconsistent laws by ensuring more people receive rents under the status quo, and thus want to defend it. JEL classifications: D74; H11; P48.
Public Choice: Analysis of Collective Decision-Making eJournal, 2017
This paper presents a theory of political specialization in which some countries uphold the rule ... more This paper presents a theory of political specialization in which some countries uphold the rule of law while others consciously choose not to do so, even though they are ex ante identical. This is borne out of two key insights: for incumbents in each country, (i) the first steps to the rule of law have the greatest private cost, and (ii) steps taken by some countries in the direction of the rule of law make it less attractive for others to follow the same path. The world equilibrium features a symbiotic relationship between despotic and rule-of-law economies: by producing technology-intensive goods that require protection of property rights, rule-of-law economies raise the relative price of natural resources and increase incentives for despotism in other countries; while the choice of despotism entails a positive externality because cheap oil makes the rule of law more attractive elsewhere in the world.
Econometric Modeling: Microeconometric Studies of Health, 2020
This paper documents the cyclical properties of housing-market variables, which are shown to be v... more This paper documents the cyclical properties of housing-market variables, which are shown to be volatile, persistent, and highly correlated with each other. Is the observed volatility in these variables due to changes in the speed at which houses are sold or changes in the number of houses that are put up for sale? An inflow-outflow decomposition shows that the inflow rate accounts for almost all of the fluctuations in sales volume. The paper then shows that a search-and-matching model with endogenous moving subject to housing demand shocks performs well in explaining fluctuations in housing-market variables. A housing demand shock induces more moving and increases the supply of houses on the market, thus one housing demand shock replicates three correlated reduced-form shocks that would be needed to match the relative volatilities and correlations among key housing-market variables.
This paper shows that the importance of lagged inflation rates in the Phillips curve is compatibl... more This paper shows that the importance of lagged inflation rates in the Phillips curve is compatible with a model of time-dependent price sticki-ness. The conventional interpretation of a significant coefficient on lagged inflation as a deviation from optimizing behaviour may therefore be mis-leading. Inflation persistence is introduced by relaxing the Calvo assump-tion that the probability of price adjustment is constant, in favour of the more plausible case where it increases with the duration of the adjustment lag. This generalized Calvo model provides a good description of infla-tion dynamics without the need to introduce any backwards-looking firms. The paper then shows the policy implications drawn from the Calvo model may be robust to mis-specification of the probability of price adjustment. 1 1
A striking fact about pricing is the prevalence of “sales”: large temporary price cuts followed b... more A striking fact about pricing is the prevalence of “sales”: large temporary price cuts followed by prices returning exactly to their former levels. This paper builds a macroeconomic model with a rationale for sales based on firms facing customers with different price sensitivities. Even if firms can adjust sales without cost, monetary policy has large real effects owing to sales being strategic substitutes: a firm’s incentive to have a sale is decreasing in the number of other firms having sales. Thus the flexibility seen in individual prices due to sales does not translate into flexibility of the aggregate price level. JEL classifications: E3; E5.
In order to understand inefficient institutions, one needs to understand what might cause the bre... more In order to understand inefficient institutions, one needs to understand what might cause the breakdown of a political version of the Coase Theorem. This paper considers an environment populated by ex-ante identical agents and develops a model of power and distribution where institutions (the "rules of the game") are set to maximize payoffs of those individuals in power. They are constrained by the threat of rebellion, where any rebels would be similarly constrained by further threats. Equilibrium institutions are the fixed point of this constrained maximization problem. This model can be applied to different economic environments. Private investment depends on credible limitations on expropriation, which can only be achieved if power is not as concentrated as those in power would like it to be, ex-post. Endogenously, this enables the group in power to act as government committed to protection of property rights, which would otherwise be time inconsistent. But the "political" Coase Theorem does not hold. Since sharing power implies sharing rents, capital taxation is inefficiently high.
This paper shows that the importance of lagged in∞ation rates in the Phillips curve is compatible... more This paper shows that the importance of lagged in∞ation rates in the Phillips curve is compatible with a model of time-dependent price sticki- ness. The conventional interpretation of a signiflcant coe-cient on lagged in∞ation as a deviation from optimizing behaviour may therefore be mis- leading. In∞ation persistence is introduced by relaxing the Calvo assump- tion that the probability of price adjustment is constant, in favour of the more plausible case where it increases with the duration of the adjustment lag. This generalized Calvo model provides a good description of in∞a- tion dynamics without the need to introduce any backwards-looking flrms. The paper then shows the policy implications drawn from the Calvo model may be robust to mis-speciflcation of the probability of price adjustment.
This paper analyses Labour’s record on monetary policy and the record of the MPC which it created... more This paper analyses Labour’s record on monetary policy and the record of the MPC which it created. The paper begins by discussing the conceptual framework and institutions behind inflation targeting as it operates in the UK. We then discuss the successes that it enjoyed up to 2007 and debate the lessons that are being learned as a consequence of the experience since then. We then raise some of the formidable challenges that UK monetary policy must now face up to including maintaining the credibility of the inflation targeting regime in the face of greater interdependence between monetary and fiscal policy, and between monetary policy and support to the banking system and financial markets.
We extend a standard New Keynesian model both to incorporate heterogeneity in spending opportunit... more We extend a standard New Keynesian model both to incorporate heterogeneity in spending opportunities along with two sources of (potentially time-varying) credit spreads and to allow a role for the central bank's balance sheet in determining equilibrium. We use the model to investigate the implications of imperfect financial intermediation for familiar monetary policy prescriptions and to consider additional dimensions of central bank policy-variations in the size and composition of the central bank's balance sheet as well as payment of interest on reserves-alongside the traditional question of the proper operating target for an overnight policy rate. We also study the special problems that arise when the zero lower bound for the policy rate is reached. We show that it is possible to provide criteria for the choice of policy along each of these possible dimensions within a single unified framework, and to achieve policy prescriptions that apply equally well regardless of whether financial markets work efficiently or not and regardless of whether the zero bound on nominal interest rates is reached or not.
A striking fact about pricing is the prevalence of "sales": large temporary price cuts ... more A striking fact about pricing is the prevalence of "sales": large temporary price cuts followed by prices returning to exactly their former levels. This paper builds a macroeconomic model with a rationale for sales based on firms facing customers with different price sensitivities. Even if firms can adjust sales without cost, monetary policy has large real effects owing to sales being strategic substitutes: a firm's incentive to have a sale is decreasing in the number of other firms having sales. Thus the flexibility seen in individual prices due to sales does not translate into flexibility of the aggregate price level. (JEL E13, E31, E52, L11, L25, L81, M31)
Economic development requires some limits on what those in power can do — the rule of law — but h... more Economic development requires some limits on what those in power can do — the rule of law — but how can restraints be imposed on the powerful when there is no-one above them? This paper studies equilibrium rules allocating power and resources established by selfinterested incumbents under the threat of rebellions from inside and outside the group in power. Commitment to uphold individuals’ rights can only be achieved if power is not as concentrated as incumbents would like it to be, ex post. Power sharing endogenously enables incumbents to commit to otherwise time-inconsistent laws by ensuring more people receive rents under the status quo, and thus want to defend it. JEL classifications: D74; H11; P48.
Public Choice: Analysis of Collective Decision-Making eJournal, 2017
This paper presents a theory of political specialization in which some countries uphold the rule ... more This paper presents a theory of political specialization in which some countries uphold the rule of law while others consciously choose not to do so, even though they are ex ante identical. This is borne out of two key insights: for incumbents in each country, (i) the first steps to the rule of law have the greatest private cost, and (ii) steps taken by some countries in the direction of the rule of law make it less attractive for others to follow the same path. The world equilibrium features a symbiotic relationship between despotic and rule-of-law economies: by producing technology-intensive goods that require protection of property rights, rule-of-law economies raise the relative price of natural resources and increase incentives for despotism in other countries; while the choice of despotism entails a positive externality because cheap oil makes the rule of law more attractive elsewhere in the world.
Econometric Modeling: Microeconometric Studies of Health, 2020
This paper documents the cyclical properties of housing-market variables, which are shown to be v... more This paper documents the cyclical properties of housing-market variables, which are shown to be volatile, persistent, and highly correlated with each other. Is the observed volatility in these variables due to changes in the speed at which houses are sold or changes in the number of houses that are put up for sale? An inflow-outflow decomposition shows that the inflow rate accounts for almost all of the fluctuations in sales volume. The paper then shows that a search-and-matching model with endogenous moving subject to housing demand shocks performs well in explaining fluctuations in housing-market variables. A housing demand shock induces more moving and increases the supply of houses on the market, thus one housing demand shock replicates three correlated reduced-form shocks that would be needed to match the relative volatilities and correlations among key housing-market variables.
This paper shows that the importance of lagged inflation rates in the Phillips curve is compatibl... more This paper shows that the importance of lagged inflation rates in the Phillips curve is compatible with a model of time-dependent price sticki-ness. The conventional interpretation of a significant coefficient on lagged inflation as a deviation from optimizing behaviour may therefore be mis-leading. Inflation persistence is introduced by relaxing the Calvo assump-tion that the probability of price adjustment is constant, in favour of the more plausible case where it increases with the duration of the adjustment lag. This generalized Calvo model provides a good description of infla-tion dynamics without the need to introduce any backwards-looking firms. The paper then shows the policy implications drawn from the Calvo model may be robust to mis-specification of the probability of price adjustment. 1 1
A striking fact about pricing is the prevalence of “sales”: large temporary price cuts followed b... more A striking fact about pricing is the prevalence of “sales”: large temporary price cuts followed by prices returning exactly to their former levels. This paper builds a macroeconomic model with a rationale for sales based on firms facing customers with different price sensitivities. Even if firms can adjust sales without cost, monetary policy has large real effects owing to sales being strategic substitutes: a firm’s incentive to have a sale is decreasing in the number of other firms having sales. Thus the flexibility seen in individual prices due to sales does not translate into flexibility of the aggregate price level. JEL classifications: E3; E5.
In order to understand inefficient institutions, one needs to understand what might cause the bre... more In order to understand inefficient institutions, one needs to understand what might cause the breakdown of a political version of the Coase Theorem. This paper considers an environment populated by ex-ante identical agents and develops a model of power and distribution where institutions (the "rules of the game") are set to maximize payoffs of those individuals in power. They are constrained by the threat of rebellion, where any rebels would be similarly constrained by further threats. Equilibrium institutions are the fixed point of this constrained maximization problem. This model can be applied to different economic environments. Private investment depends on credible limitations on expropriation, which can only be achieved if power is not as concentrated as those in power would like it to be, ex-post. Endogenously, this enables the group in power to act as government committed to protection of property rights, which would otherwise be time inconsistent. But the "political" Coase Theorem does not hold. Since sharing power implies sharing rents, capital taxation is inefficiently high.
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