Periodic Reporting for period 1 - DCS (Dynamic Cross Sections and Heterogeneity in Macroeconomics)
Période du rapport: 2022-10-01 au 2025-03-31
The project addresses a key challenge in modern macroeconomics: understanding the implications of substantial heterogeneity among households and firms, a feature largely ignored in representative-agent models. This heterogeneity is crucial for explaining economic behavior and the response to shocks, particularly in the presence of frictions and lumpy adjustments (e.g. investment decisions, technology adoption, pricing).
DCS goal is to develop new methods for characterizing equilibrium dynamics in economies with realistic distributions of agents. The project focuses on two major applications:
1. Understanding macroeconomic responses to shocks by identifying and quantifying frictions in models with lumpy behavior.
2. Analyzing dynamic strategic complementarities and network effects, where individual decisions depend on others' behavior (e.g. firms or consumers adopting new technologies based on peer decisions).
The project integrates social science disciplines such as behavioral microeconomics and game theory to model strategic interactions. The expected impact includes better tools for macroeconomic analysis and improved models to inform economic policy.
DCS goal is to develop new methods for characterizing equilibrium dynamics in economies with realistic distributions of agents. The project focuses on two major applications:
1. Understanding macroeconomic responses to shocks by identifying and quantifying frictions in models with lumpy behavior.
2. Analyzing dynamic strategic complementarities and network effects, where individual decisions depend on others' behavior (e.g. firms or consumers adopting new technologies based on peer decisions).
The project integrates social science disciplines such as behavioral microeconomics and game theory to model strategic interactions. The expected impact includes better tools for macroeconomic analysis and improved models to inform economic policy.
The project delivered several theoretical and empirical contributions:
1. Sticky Prices and Sufficient Statistics: A key result shows that the persistence of aggregate responses to nominal shocks is captured by a single observable statistic: the ratio of kurtosis to frequency (K/F) of price changes. An empirical test using French microdata (Alvarez et al.) confirms this result, showing a strong correlation between K/F and price non-neutrality. This work, forthcoming in Review of Economic Studies, supports the statistic’s validity in actual economies.
2. Large Shocks and Fast Price Adjustments: In collaboration with Cavallo and Miyahara (AER: Insights, forthcoming), the project shows that firms adjust prices more rapidly after large shocks, such as the 2022 energy price surge. Using a New Keynesian model calibrated to pre-shock data, the study demonstrates the presence of "state dependence"—firms are more likely to change prices when markups are misaligned. These results have important implications for inflation forecasting and call into question the Calvo pricing models often used by central banks.
3. Dynamic Strategic Complementarities: With Alvarez and Souganidis (Econometrica, 2023), a new analytic framework was developed to study general equilibrium in models with strategic complementarities in price-setting. By adapting perturbation techniques from physics, the paper shows that complementarities can significantly amplify the impact of nominal shocks. As the degree of complementarity increases, impulse responses grow convexly, potentially destabilizing equilibrium.
1. Sticky Prices and Sufficient Statistics: A key result shows that the persistence of aggregate responses to nominal shocks is captured by a single observable statistic: the ratio of kurtosis to frequency (K/F) of price changes. An empirical test using French microdata (Alvarez et al.) confirms this result, showing a strong correlation between K/F and price non-neutrality. This work, forthcoming in Review of Economic Studies, supports the statistic’s validity in actual economies.
2. Large Shocks and Fast Price Adjustments: In collaboration with Cavallo and Miyahara (AER: Insights, forthcoming), the project shows that firms adjust prices more rapidly after large shocks, such as the 2022 energy price surge. Using a New Keynesian model calibrated to pre-shock data, the study demonstrates the presence of "state dependence"—firms are more likely to change prices when markups are misaligned. These results have important implications for inflation forecasting and call into question the Calvo pricing models often used by central banks.
3. Dynamic Strategic Complementarities: With Alvarez and Souganidis (Econometrica, 2023), a new analytic framework was developed to study general equilibrium in models with strategic complementarities in price-setting. By adapting perturbation techniques from physics, the paper shows that complementarities can significantly amplify the impact of nominal shocks. As the degree of complementarity increases, impulse responses grow convexly, potentially destabilizing equilibrium.
The methods developed, especially for analyzing dynamic complementarities, can be extended to other areas of macroeconomics. One promising application is the diffusion of new technologies, such as Central Bank Digital Currencies (CBDCs), where network effects are central: the benefit of adoption depends on how widely the technology is used.
Potential Impact and Future Directions:
-Theoretical tools applicable across various macroeconomic domains.
-Empirical insights that improve understanding of how economies respond to shocks.
-Direct implications for central bank models and policy design.
To maximize uptake and long-term impact, the project identifies key next steps:
-Continued empirical testing in broader contexts.
-Dissemination to policymakers (e.g. presentation at the ECB Sintra conference).
-Application to financial markets and technological diffusion.
-Consideration of supportive regulation and data-sharing for further experimentation.
Key Publications (ERC Acknowledged)
Cavallo, Lippi, Miyahara – Large shocks travel fast, AER: Insights, forthcoming
Alvarez et al. – Empirical Investigation of a Sufficient Statistic, Review of Economic Studies, forthcoming
Alvarez, Lippi, Souganidis – Caballero-Engel meet Lasry-Lions, Mathematics and Financial Economics, 2024
Alvarez, Lippi, Souganidis – Price Setting with Strategic Complementarities as a Mean Field Game, Econometrica, 2023
Calvia et al. – A simple planning problem for COVID-19 lockdown, Economic Theory, 2024
Lippi, Perri – Unequal Growth, Journal of Monetary Economics, 2023
Potential Impact and Future Directions:
-Theoretical tools applicable across various macroeconomic domains.
-Empirical insights that improve understanding of how economies respond to shocks.
-Direct implications for central bank models and policy design.
To maximize uptake and long-term impact, the project identifies key next steps:
-Continued empirical testing in broader contexts.
-Dissemination to policymakers (e.g. presentation at the ECB Sintra conference).
-Application to financial markets and technological diffusion.
-Consideration of supportive regulation and data-sharing for further experimentation.
Key Publications (ERC Acknowledged)
Cavallo, Lippi, Miyahara – Large shocks travel fast, AER: Insights, forthcoming
Alvarez et al. – Empirical Investigation of a Sufficient Statistic, Review of Economic Studies, forthcoming
Alvarez, Lippi, Souganidis – Caballero-Engel meet Lasry-Lions, Mathematics and Financial Economics, 2024
Alvarez, Lippi, Souganidis – Price Setting with Strategic Complementarities as a Mean Field Game, Econometrica, 2023
Calvia et al. – A simple planning problem for COVID-19 lockdown, Economic Theory, 2024
Lippi, Perri – Unequal Growth, Journal of Monetary Economics, 2023