Learning and Disinflation in a HANK Model
- This paper revisits monetary policy in a heterogeneous agent New Keynesian model where agents use an adaptive learning strategy named recursive least square learning in order to form their expectations. Due to the households finite heterogeneity triggered by idiosyncratic unemployment risk, the model is subject to micro-founded heterogeneous expectations that are not necessarily anchored to the RE path. Households experience different histories which has non trivial consequences on their individual AL processes. In this model, supply shocks generate precautionary saving and possible long lasting deflationary traps associated with excess saving. Dovish policies focused on closing the output gap dampen those effects which is in contradiction with previously established representative agent results. Nonetheless, only price level targeting appears to resolve most of the problem by better anchoring long run expectations of future utility flows.
- Working paper on demand
Price Setting Frequency and the Phillips CurveJoint with Emanuel GASTEIGER (TU Wien).
- We develop a New Keynesian (NK) model with endogenous price setting frequency. Whether a firm updates its price in a given period depends on an analysis of expected cost and benefits modeled by a discrete choice process. A firm decides to update the price when expected benefits outweigh expected cost and then resets the price optimally. As markups are countercyclical, the model predicts that prices are more flexible during expansions and less flexible during recessions. Our quantitative analysis shows that contrary to the standard NK model, the assumed price setting behaviour: is consistent with micro data on price setting frequency; gives rise to an accelerating Phillips curve that is steeper during expansions and flatter during recessions; explains shifts in the Phillips curve associated with different historical episodes without relying on implausible high cost-push shocks and nominal rigidities.
Social Learning and Monetary Policy at the Effective Lower BoundJoint with Jasmina ARIFOVIC (Simon Fraser University), Isabelle SALLE (Bank of Canada and University of Amsterdam) ,Gauthier VERMANDEL (Paris-Dauphine University and France Stratégie).
- This paper develops a model that jointly accounts for the missing disinflation in the wake of the Great Recession and the subsequently observed inflation-less recovery. The key mechanism works through heterogeneous expectations that may durably lose their anchorage to the central bank (CB)'s target and coordinate on particularly persistent below-target paths. The welfare cost associated with persistent low inflation may be reduced if the CB announces to the agents its target or its own inflation forecasts, as communication helps coordinate expectations. However, the CB may lose its credibility whenever its announcements become decoupled from actual inflation.