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James Costain

15 May 2009
WORKING PAPER SERIES - No. 1053
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Abstract
This paper reviews recent approaches to modelling the labour market and assesses their implications for inflation dynamics through both their effect on marginal cost and on price-setting behaviour. In a search and matching environment, we consider the following modelling set-ups: right-to-manage bargaining vs. efficient bargaining, wage stickiness in new and existing matches, interactions at the firm level between price and wage-setting, alternative forms of hiring frictions, search on-the-job and endogenous job separation. We find that most specifications imply too little real rigidity and, so, too volatile inflation. Models with wage stickiness and right-to-manage bargaining or with firm-specific labour emerge as the most promising candidates.
JEL Code
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
E24 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital
J64 : Labor and Demographic Economics→Mobility, Unemployment, Vacancies, and Immigrant Workers→Unemployment: Models, Duration, Incidence, and Job Search
Network
Wage dynamics network
20 April 2011
WORKING PAPER SERIES - No. 1333
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Abstract
Starting from the assumption that firms are more likely to adjust their prices when doing so is more valuable, this paper analyzes monetary policy shocks in a DSGE model with firm-level heterogeneity. The model is calibrated to retail price microdata, and inflation responses are decomposed into “intensive”, “extensive”, and “selection” margins. Money growth and Taylor rule shocks both have nontrivial real effects, because the low state dependence implied by the data rules out the strong selection effect associated with fixed menu costs. The response to firm-specific shocks is gradual, though inappropriate econometrics might make it appear immediate.
JEL Code
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
D81 : Microeconomics→Information, Knowledge, and Uncertainty→Criteria for Decision-Making under Risk and Uncertainty
25 August 2011
WORKING PAPER SERIES - No. 1375
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Abstract
This paper proposes two models in which price stickiness arises endogenously even though firms are free to change their prices at zero physical cost. Firms are subject to idiosyncratic and aggregate shocks, and they also face a risk of making errors when they set their prices. In our first specification, firms are assumed to play a dynamic logit equilibrium, which implies that big mistakes are less likely than small ones. The second specification derives logit behavior from an assumption that precision is costly. The empirical implications of the two versions of our model are very similar. Since firms making sufficiently large errors choose to adjust, both versions generate a strong "selection effect" in response to a nominal shock that eliminates most of the monetary nonneutrality found in the Calvo model. Thus the model implies that money shocks have little impact on the real economy, as in Golosov and Lucas (2007), but fits microdata better than their specification.
JEL Code
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
D81 : Microeconomics→Information, Knowledge, and Uncertainty→Criteria for Decision-Making under Risk and Uncertainty
C72 : Mathematical and Quantitative Methods→Game Theory and Bargaining Theory→Noncooperative Games
15 July 2014
WORKING PAPER SERIES - No. 1693
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Abstract
We model retail price stickiness as the result of errors due to costly decision-making. Under our assumed cost function for the precision of choice, the timing of price adjustments and the prices firms set are both logit random variables. Errors in the prices firms set help explain micro
JEL Code
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
D81 : Microeconomics→Information, Knowledge, and Uncertainty→Criteria for Decision-Making under Risk and Uncertainty
C73 : Mathematical and Quantitative Methods→Game Theory and Bargaining Theory→Stochastic and Dynamic Games, Evolutionary Games, Repeated Games
26 April 2019
WORKING PAPER SERIES - No. 2272
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Abstract
We study the effects of monetary shocks in a model of state-dependent price and wage adjustment based on “control costs”. Suppliers of retail goods and of labor are both monopolistic competitors that face idiosyncratic productivity shocks and nominal rigidities. Stickiness arises because precise decisions are costly, so agents choose to tolerate small errors in the timing of adjustments. Our simulations are calibrated to microdata on the size and frequency of price and wage changes. Money shocks have less persistent real effects in our state-dependent model than they would a time-dependent framework, but nonetheless we obtain sufficient monetary nonneutrality for consistency with macroeconomic evidence. Nonneutrality is primarily driven by wage rigidity, rather than price rigidity. State-dependent nominal rigidity implies a flatter Phillips curve as trend inflation declines, because nominal adjustments become less frequent, making short-run inflation less reactive to shocks.
JEL Code
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
D81 : Microeconomics→Information, Knowledge, and Uncertainty→Criteria for Decision-Making under Risk and Uncertainty
C73 : Mathematical and Quantitative Methods→Game Theory and Bargaining Theory→Stochastic and Dynamic Games, Evolutionary Games, Repeated Games
27 June 2019
RESEARCH BULLETIN - No. 59
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Abstract
Recent low inflation is motivating new research to better characterise how individual firms and workers set prices and wages. In this article, we describe a new approach which emphasises that the costs of decision-making may limit the precision of price and wage changes. As well as making better sense of price and wage changes in microeconomic data, this new approach also strikes a middle ground between two leading models of monetary policy transmission, improving our quantitative understanding of the short-run effects of monetary policy on output and the short-run trade-off between inflation and unemployment.
JEL Code
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
D81 : Microeconomics→Information, Knowledge, and Uncertainty→Criteria for Decision-Making under Risk and Uncertainty
C73 : Mathematical and Quantitative Methods→Game Theory and Bargaining Theory→Stochastic and Dynamic Games, Evolutionary Games, Repeated Games