Estimating Granular Real Rigidity
with Shruti Mishra
This paper estimates real rigidities at the granular level by exploiting their connection to variable markups and demand parameters. We introduce a novel theoretical framework for a general oligopolistic market that allows us to derive sufficient statistics independent of the competition environment and create an estimation procedure that can be applied to multiple markets simultaneously. Our approach gives us the most complete and detailed quantitative picture of real rigidities to date, including heterogeneous cost pass-through and demand shock effect, strategic complementarities between individual firms, and asymmetry of price adjustment.
Monetary Policy under Labor Market Power
with Yannick Timmer, Rui Mano and Anke Weber
Using the near universe of online vacancy postings in the U.S., we study the interaction between labor market power and monetary policy. We show empirically that labor market power amplifies the labor demand effects of monetary policy, while not disproportionately affecting wage growth. A search and matching model in which firms can attract workers by either offering higher wages or posting more vacancies can rationalize these findings. We also find that vacancy postings that do not require a college degree or technology skills are more responsive to monetary policy, especially when firms have labor market power. Our results help explain the “wageless” recovery after the 2008 financial crisis and the flattening of the wage Phillips curve, especially for the low-skilled, who saw stagnant wages but a robust decline in unemployment. In the current context of rising interest rates, unemployment is likely to rise more in poorer U.S. regions because labor market power is more prevalent there, thus leading to rising inequality.
Heterogeneous Wealth Effect in Unemployment
with Shruti Mishra
First studies of monetary policy non-neutrality with identified shocks, such as Romer & Romer (2004), reported a large and positive effect of monetary contraction on unemployment. Later studies, however, found that these large effects are a specific attribute of the time period. We relate those findings to differences in household portfolios. After a monetary contraction indebted individuals experience a negative wealth effect and are motivated to work and search for jobs more actively. Because of this effect, in times when consumers are highly indebted, unemployment does not rise significantly or even decrease after a monetary contraction. In this paper, we model this mechanism and provide empirical results supporting our conclusions.
Monetary Policy Implications of Heterogeneous Mortgage Refinancing
with Martsella Davitaya
We show that credit score heterogeneity dampens monetary policy transmission through fixed-rate mortgages. Using Fannie Mae Single-Family Loan-Level historical data, we show that a 1% increase in mortgage rate increases the refinancing probability for borrowers with a FICO credit score of 800 twice as much as that of borrowers with a FICO score of 700. We then develop a refinancing model and find that credit score heterogeneity dampens consumption response to monetary policy by 11%, compared to a standard model with only mortgage rate heterogeneity. Borrowers with lower credit scores face tighter borrowing limits and benefit from refinancing more than borrowers with higher credit scores, but face more difficulties obtaining refinance loans, resulting in a smaller consumption response.
Anchored or De-anchored? Inflation Compensation and Monetary Policy
with Martsella Davitaya and Shruti Mishra
If inflation expectations are anchored, then their sensitivity to monetary policy should be smaller than if they are de-anchored. Using daily bond yield data, we show that the sensitivity of inflation expectations to monetary policy is lower if the Fed is more responsive to inflation during the previous CPI release. The empirical strategy consists of two steps. First, we measure market expectations about the Fed’s reaction to inflation by regressing the changes of different interest rates around the CPI release dates on the surprise change in CPI. Second, we estimate the sensitivity of inflation expectations’ response to monetary policy based on the expectations about the Fed’s reaction to inflation.