I am chief of the Monetary Studies section in the Monetary Affairs Division of the Federal Reserve Board.* My section focuses on strategic monetary policy issues and central bank communications as well as on longer-term research that informs the conduct of monetary policy and understanding of the macroeconomy. I have a special interest in the empirical importance of nominal rigidities and their implications for inflation dynamics and monetary policy.
Je suis chef de la Section des études monétaires de la Division des affaires monétaires à la Réserve fédérale américaine.** Ma section supporte les aspects stratégiques et les communications de la politique monétaire, tant au niveau de la modélisation économique, de l'analyse que de la recherche. J'ai un intérêt particulier pour l'importance empirique des rigidités nominales et leurs implications pour l'inflation et la politique monétaire.
Research - Recherche
Understanding the New Normal: The Role of Demographics (with B. Johannsen and D. López-Salido)
Since the Great Recession, the U.S. economy has experienced low real GDP growth and low real interest rates, including for long maturities. We show that these developments were largely predictable by calibrating an overlapping-generation model with a rich demographic structure to observed and projected changes in U.S. population, family composition, life expectancy, and labor market activity. The model accounts for a 1¼-percentage-point decline in both real GDP growth and the equilibrium real interest rate since 1980—essentially all of the permanent declines in those variables according to some estimates. The model also implies that these declines were especially pronounced over the past decade or so because of demographic factors most-directly associated with the post-war baby boom and the passing of the information technology boom. Our results further suggest that real GDP growth and real interest rates will remain low in coming decades, consistent with the U.S. economy having reached a "new normal."
Finance and Economics Discussion Series (FEDS): October 2016
The Cyclicality of Sales, Regular, and Effective Prices: Comment (with D. López-Salido and J. Sockin)
Coibion, Gorodnichenko, and Hong (2015) argue that the CPI underestimates the deceleration in consumer prices during economic downturns because the index fails to account for the reallocation of consumer spending from high- to low-price stores. We show that this conclusion hinges on some nonstandard methodological choices, including an aggressive censoring of price adjustments and the systematic imputation of missing price adjustments with zeros. Under our preferred methodology, the authors' regression results no longer indicate that greater store switching during downturns is a statistically or economically significant phenomenon.
Published in the American Economic Review, vol. 107(10), pages 3229-42, October 2017.
Online appendix: here
Latest working paper update: January 2017
Finance and Economics Discussion Series (FEDS): July 2015
Replication files: here
Small Price Responses to Large Demand Shocks (with D. López-Salido)
We study the pricing response of U.S. supermarkets to large demand shocks triggered by labor conflicts, mass population relocation, and shopping sprees around major snowstorms and hurricanes. Our focus on demand shocks is novel in the empirical literature that uses large datasets of individual data to bridge micro price behavior and aggregate price dynamics. We find that large swings in demand have, at best, modest effects on the level of retail prices, consistent with flat short- to medium-term supply curves. This finding holds even when shocks are highly persistent and despite stores adjusting prices frequently. We also uncover evidence of tit-for-tat behavior by which retailers with radically different demand shocks nonetheless seek to match their local competitors' pricing movements and recourse to sales and promotions.
Conditionally accepted at the Journal of the European Economic Association.
Finance and Economics Discussion Series (FEDS): March 2014
Wall Street Journal blog: here
Missing Import Price Changes and Low Exchange Rate Pass-Through (with B. Mandel and R. Vigfusson)
A large body of empirical work has found that exchange rate movements have only modest eﬀects on inﬂation. However, the response of an import price index to exchange rate movements may be underestimated because some import price changes are missed when constructing the index. We investigate downward biases that arise when items experiencing a price change are especially likely to exit or to enter the index. We show that, in theoretical pricing models, entry and exit have diﬀerent implications for the timing and size of these biases. Using Bureau of Labor Statistics (BLS) microdata, we derive empirical bounds on the magnitude of these biases and construct alternative price indexes that are less subject to selection eﬀects. Our analysis suggests that the biases induced by selective exits and entries are modest over typical forecast horizons. As such, the empirical evidence continues to support the conclusion that exchange rate pass-through to U.S. import prices is low.
Published in the American Economic Journal: Macroeconomics, vol. 6(2), pages 156-206, April 2014.
International Finance Discussion Paper (IFDP): December 2012
Individual Price Adjustment along the Extensive Margin (with D. López-Salido and N. Vincent)
Firms employ a rich variety of pricing strategies whose implications for aggregate price dynamics often diverge. This situation poses a challenge for macroeconomists interested in bridging micro and macro price stickiness. In responding to this challenge, we note that differences in macro price stickiness across pricing mechanisms can often be traced back to price changes that are either triggered or cancelled by shocks. We exploit observed micro price behavior to quantify the importance of this margin of adjustment for the response of inflation to shocks. Across a range of empirical exercises, we find strong evidence that changes in the timing of price adjustments contribute significantly to the flexibility of the aggregate price level.
Published in NBER Macroeconomics Annual 2012
NBER working paper version: July 2012
International Finance Discussion Paper (IFDP): June 2012
Slides: April 2012
Data behind figures: here
Price Setting during Low and High Inflation: Evidence from Mexico
This paper provides new insight into the relationship between inflation and consumer price setting by examining a large data set of Mexican consumer prices covering episodes of both low and high inflation, as well as the transition between the two. Overall, the economy shares several characteristics with time-dependent models when the annual inflation rate is low (below 10-15%), while displaying strong state dependence when inflation is high (above 10-15%). At low inflation levels, the aggregate frequency of price changes responds little to movements in inflation because movements in the frequency of price decreases partly offset movements in the frequency of price increases. When the annual inflation rate rises beyond 10-15 percent, however, there are no longer enough price decreases to counterbalance the rising occurrence of price increases, making the frequency of price changes more responsive to inflation. It is shown that a simple menu-cost model with idiosyncratic technology shocks predicts remarkably well the level of the average frequency and magnitude of price changes over a wide range of inflation.
Published in the Quarterly Journal of Economics, vol. 124(3), pages 1221-1263, August 2009.
International Finance Discussion Paper (IFDP): May 2007
Slides: January 2008
Replication files : here (New: My Mexican micro dataset for 1993:m9-2010:m12 period is now available!)
Interest on Excess Reserves as a Monetary Policy Instrument: the Experience of Foreign Central Banks (with D. Bowman and M. Leahy)
This paper reviews the experience of eight major foreign central banks with policy interest rates comparable to the interest rate on excess reserves paid by the Federal Reserve. We pursue two main lines of inquiry: 1) To what extent have these policy interest rates been lower bounds for short-term market rates, and 2) to what extent has tightening that included increasing these policy rates been achieved without reliance on reductions in reserves or other deposits held at the central bank? The foreign experience suggests that policy rate floors can be effective lower bounds for market rates, although incomplete access to central bank accounts and interest on them weakens this result. In addition, the foreign experience suggests that tightening by increasing the interest rate paid on central bank balances can help reduce or eliminate the need to drain balances. These results are consistent with theoretical results that show that tightening without draining is possible, irrespective of whether excess reserves are large or small.
International Finance Discussion Paper (IFDP): March 2010
Short Pieces - Articles Courts
Gagnon, E., B. Johannsen, and D. Lopez-Salido (2018). "Comment on the Demographic Deficit," Journal of Monetary Economics., vol. 93 (January), pages 63-67.
Gagnon, E. and D. Lopez-Salido (2015). "Mass Population Displacement and Retail Activities in the Wake of Hurricane Katrina," FEDS Notes, August 26.
Discussions and guest presentations - Discussions et présentations-invitées
"The Elusive Cost of Inflation: Price Dispersion during the U.S. Great Inflation" by Nakamura, Steinsson, Sun, and Villar, Inflation: Drivers and Dynamics Conference, Cleveland Fed, September 2016. slides
"Real Rigidities and Nominal Price Changes" by Peter J. Klenow and Jonathan L. Willis, ASSA Meetings, Philadelphia, January 2014. slides
"Inflation Dynamics during the Financial Crisis" by S. Gilchrist, R. Schoenle, J. Sim, and E. Zakjajsek, conference “Inflation Dynamics in a Post-Crisis Globalized Economy” at Swiss National Bank, August 2013. slides
"Everything all the time? Entry and Exit in U.S. Import Varieties" by Roc Armenter and Miklós Koren, SCIEA Meeting, Washington, D.C., May 2013. slides
"Quelques milliards d'observations plus tard... que savons-nous de la rigidité des prix?" Présentation invitée au congrès annuel de la Société canadienne de science économique, Mont-Tremblant, mai 2012. diapos
"Real Rigidities: Evidence from an Online Marketplace" by Takayuki Mizuno, Makoto Nirei, and Tsutomu Watanabe, presented at the conference "Understanding price dynamics: recent advances," Banque de France, 15-16 October 2009. slides
"A Test for the Presence of Central Bank Intervention in the Foreign Exchange Market with an Application to the Bank of Canada" par Douglas Hodgson, Montebello, 48e congrès annuel de la Société canadienne de sciences économiques, 24 au 26 mai 2008. diapos (In French)
"Microeconomic sources of real exchange rate variation" by Chris Telmer (Carnegie Mellon), Mario Crucini (Vanderbilt University), Canadian Macro Study Group, Ottawa, 10 November 2007. slides
"Regular Adjustment : Theory and Evidence" by Jerzy D. Konieczny and Fabio Rumler, Rimini Center For Economic Analysis Colloquium on the Macroeconomics of Price Setting, May 2007. slides.