Andres Blanco, Javier Cravino, 17 August 2018

Economists have often interpreted the observation that movements in real exchange rates are large, persistent, and closely track movements in nominal rates while cross-country differences in inflation rates are small and stable as direct evidence for nominal price rigidities. This column uses the microdata behind the construction of the consumer price index to isolate the real exchange rate for the subset of goods that change prices. This ‘reset exchange rate’ moves with the real exchange rate, suggesting that sticky prices are not a primary factor in dampening the response of inflation to exchange rate shocks.

Fernando Alvarez, Hervé Le Bihan, Francesco Lippi, 30 September 2014

The assumption of sticky prices is central in understanding the effect of monetary policies on the economy. Yet, how best to model price stickiness is an unresolved issue. This column assesses a selection of models that are able to reproduce cross-sectional heterogeneity in the setting of prices. The authors derive a formula which gives a useful approximation of the effect of a small monetary shock on total output. The formula demonstrates the importance of the Kurtosis of the distribution of price changes. It can be applied to a large class of models, including such with different timing of price adjustment.

Pascal Michaillat, Emmanuel Saez, 12 August 2014

High US unemployment rates following the crisis are a primary policy concern, but are poorly explained by existing models. This column introduces a new model of frictional labour and product markets. Price rigidities yield testable predictions pointing to the source of unemployment and product market tightness. Evidence suggests that unemployment fluctuations are driven mostly by aggregate demand shocks.

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