Periodic Reporting for period 3 - MACROPMF (Macroeconomic Dynamics with Product Market Frictions)
Periodo di rendicontazione: 2019-02-01 al 2020-01-31
Aggregate demand has fallen substantially in developed economies during the Great Recession starting in 2008, and has recovered slowly since then. Weak aggregate demand has contributed to the unusual slow recovery of GDP and inflation after the recession. Low levels of interest rates have substantially reduced the ability of central banks to stimulate aggregate demand, so that alternative policy instruments have been proposed and new transmission mechanisms have been studied. This project contributes to this debate by advancing our knowledge about the response of household consumption to changes in income, such as fiscal transfers, as well as the role of policy uncertainty for weak aggregate demand.
The project aims at addressing this issue by pursuing two main objectives. First, it provides novel empirical evidence about household consumption behavior (i) over the business cycle, (ii) in response to transitory fiscal shocks and (iii) in response to increased policy uncertainty. The questions we address empirically are: How does aggregate household demand expand in a boom and contract in a recession? Are these fluctuations associated to a turnover in the composition of the consumption basket, and how does it respond to transitory income shocks? When is policy uncertainty affecting aggregate demand?
Second, the project delivers new economic models which, combined with the data, allow to study the transmission of policy shocks to aggregate demand and obtain key insights about their quantitative effects on relevant welfare measures. The questions we address with the models are: What are the implications of fluctuations in the composition of the consumption basket for the measurement of the welfare relevant measure of inflation? How does the effectiveness of demand stimulus policies changes? What are the implications for firm pricing and product innovation strategies?
Answering these questions is crucial for policy design aimed at stimulating the economy through incentivizing aggregate demand. This task is particularly relevant at times when conventional instruments of monetary policy interventions are unavailable.
We find that about half of the cyclical change in US non-durable consumption expenditure is due to changes in the products entering households' consumption basket (the extensive margin). Changes in the basket are driven by fluctuations in the rate at which households add new products; removals are relatively acyclical. These patterns are largely explained by the fact that households respond to income increases by adopting new product varieties in their consumption basket. Fluctuations in household adoption cause a bias in the measurement of inflation, drive the aggregate demand for new products and amplify the welfare effects of fiscal stimulus to demand. An increase in the utility of consumption relatively to the cost of search results in higher demand elasticity and lower prices, amplifying the effects of demand shocks on output. This provides a new channel affecting the relationship between consumer search and price markups in response to aggregate shocks.
Moreover, in response to the announcement of a future monetary loosening, such as Forward Guidance, only wealthy households (creditors) act as if the announcement will be fully implemented, due to the potential wealth losses from future inflation. As a result the economy responds as if aggregate net wealth falls, which attenuates the effects of the announcement. Redistributing from super-wealthy to middle-wealthy households makes the announcement more expansionary, in the extreme as expansionary as under a fully credible announcement.
The project aims at addressing this issue by pursuing two main objectives. First, it provides novel empirical evidence about household consumption behavior (i) over the business cycle, (ii) in response to transitory fiscal shocks and (iii) in response to increased policy uncertainty. The questions we address empirically are: How does aggregate household demand expand in a boom and contract in a recession? Are these fluctuations associated to a turnover in the composition of the consumption basket, and how does it respond to transitory income shocks? When is policy uncertainty affecting aggregate demand?
Second, the project delivers new economic models which, combined with the data, allow to study the transmission of policy shocks to aggregate demand and obtain key insights about their quantitative effects on relevant welfare measures. The questions we address with the models are: What are the implications of fluctuations in the composition of the consumption basket for the measurement of the welfare relevant measure of inflation? How does the effectiveness of demand stimulus policies changes? What are the implications for firm pricing and product innovation strategies?
Answering these questions is crucial for policy design aimed at stimulating the economy through incentivizing aggregate demand. This task is particularly relevant at times when conventional instruments of monetary policy interventions are unavailable.
We find that about half of the cyclical change in US non-durable consumption expenditure is due to changes in the products entering households' consumption basket (the extensive margin). Changes in the basket are driven by fluctuations in the rate at which households add new products; removals are relatively acyclical. These patterns are largely explained by the fact that households respond to income increases by adopting new product varieties in their consumption basket. Fluctuations in household adoption cause a bias in the measurement of inflation, drive the aggregate demand for new products and amplify the welfare effects of fiscal stimulus to demand. An increase in the utility of consumption relatively to the cost of search results in higher demand elasticity and lower prices, amplifying the effects of demand shocks on output. This provides a new channel affecting the relationship between consumer search and price markups in response to aggregate shocks.
Moreover, in response to the announcement of a future monetary loosening, such as Forward Guidance, only wealthy households (creditors) act as if the announcement will be fully implemented, due to the potential wealth losses from future inflation. As a result the economy responds as if aggregate net wealth falls, which attenuates the effects of the announcement. Redistributing from super-wealthy to middle-wealthy households makes the announcement more expansionary, in the extreme as expansionary as under a fully credible announcement.
"The working paper “The Extensive Margin of Aggregate Consumption Demand” shows that household consumption expenditure can change over time along the intensive and the extensive margin. The intensive margin reflects change in the amount spent on varieties already purchased by the household in the previous period. The extensive margin reflects net additions of varieties to the consumption basket.
In “Price Dynamics with Customer Markets”, using rich U.S. data on consumer shopping behavior and good prices, we document that customer turnover across retailers is sensitive to price variation. This paper is now published in a leading scientific journal, “The International Economic Review”.
In ""Ambiguous Policy Announcements"" we study the effects of monetary announcements when agents face uncertainty about the commitment capacity of the monetary authority. This paper is now published in a leading scientific journal, “The Review of Economic Studies”.
In""Aggregate Risk or Aggregate Uncertainty? Evidence from UK Households"" we measure the amount of uncertainty faced by UK households relying on the Bank of England Inflation Attitudes Survey that asks households for their expected inflation as well for their preferences about future inflation and nominal interest rates.
In ""Learning by Shopping: Consumers’ Uncertainty, Markups and Monetary Shocks"" we collect evidence showing that households learn about aggregate inflation from prices posted in the shops they visit.
The results of this work has been presented at several workshops and international conferences both in Europe and in the United States, such as the NBER Summer Institute, the Minnesota Macro Workshop, the SED Annual Meetings, the CEPR Annual Meetings, and at several central banks, such as the Bank of Spain, Banque de France, Bank of England, New York FED, Norges Bank."
In “Price Dynamics with Customer Markets”, using rich U.S. data on consumer shopping behavior and good prices, we document that customer turnover across retailers is sensitive to price variation. This paper is now published in a leading scientific journal, “The International Economic Review”.
In ""Ambiguous Policy Announcements"" we study the effects of monetary announcements when agents face uncertainty about the commitment capacity of the monetary authority. This paper is now published in a leading scientific journal, “The Review of Economic Studies”.
In""Aggregate Risk or Aggregate Uncertainty? Evidence from UK Households"" we measure the amount of uncertainty faced by UK households relying on the Bank of England Inflation Attitudes Survey that asks households for their expected inflation as well for their preferences about future inflation and nominal interest rates.
In ""Learning by Shopping: Consumers’ Uncertainty, Markups and Monetary Shocks"" we collect evidence showing that households learn about aggregate inflation from prices posted in the shops they visit.
The results of this work has been presented at several workshops and international conferences both in Europe and in the United States, such as the NBER Summer Institute, the Minnesota Macro Workshop, the SED Annual Meetings, the CEPR Annual Meetings, and at several central banks, such as the Bank of Spain, Banque de France, Bank of England, New York FED, Norges Bank."
The project contributes to the economic literature by documenting that: i) half of the cyclical change in US non-durable consumption expenditure is due to changes in the products entering households' consumption basket; ii) changes in the basket are driven by fluctuations in the rate at which households add new products while removals are relatively acyclical; iii) these patterns are largely explained by the fact that households respond to income increases by adopting new product varieties in their consumption basket; iv) fluctuations in household adoption cause a bias in the measurement of inflation, drive the aggregate demand for new products and amplify the welfare effects of fiscal stimulus to demand. The project shows that CPI inflation measured at a household level would have been 1% higher during the Great Recession, and argues in favor of a more disaggregated measure of inflation to account for such bias.
The project has provided novel evidence that turnover of consumers at retailers is sensitive to price variation so that firms have a quantitatively relevant incentive to retain customers when setting their prices.This provides a new channel affecting the relationship between consumer search and price markups in response to aggregate shocks.
The project documents the relationship between heterogeneity in household wealth and transmission of monetary policy announcements to household consumption decisions and expectations. In response to the Froward Guidance announcement by the ECB in 2012, heterogeneity in agents inflation expectations between rich and poor Italian provinces has increased. The project shows that, combined with uncertainty about future monetary policy, the interaction of wealth inequality with expectations heterogeneity causes a fall in aggregate demand.
The project has provided novel evidence that turnover of consumers at retailers is sensitive to price variation so that firms have a quantitatively relevant incentive to retain customers when setting their prices.This provides a new channel affecting the relationship between consumer search and price markups in response to aggregate shocks.
The project documents the relationship between heterogeneity in household wealth and transmission of monetary policy announcements to household consumption decisions and expectations. In response to the Froward Guidance announcement by the ECB in 2012, heterogeneity in agents inflation expectations between rich and poor Italian provinces has increased. The project shows that, combined with uncertainty about future monetary policy, the interaction of wealth inequality with expectations heterogeneity causes a fall in aggregate demand.