I just got back from the Berkeley Economics annual skit party. The skit party is combined with an auction to raise money for the Graduate Economics Association. Professor Yuriy Gorodnichenko contributed a very interesting auction item: a promise to pay $500 if Christina Romer or Janet Yellen becomes Fed chair at any time in the future.
The bidding started at $50, and quickly jumped up to $200. I was bidding against Gabriel Chodorow-Reich, a fellow macro student. I chickened out and went silent after he bid $220, so he won. Immediately after, I was kicking myself for not sticking in a little longer. I think Gabe got a heck of a deal-- plus I would just love to be able to say that I had bought this unique asset.
Professor Gorodnichenko (who also swept the awards ceremony tonight, winning the Best Professor and Best Adviser awards) donated another auction item-- a check with the amount drawn from a beta distribution with parameters alpha=3 and beta=2, multiplied by $100. The beta distribution is only nonzero on the unit interval, so the check will have value between $0 and $100. The mean of the beta distribution is alpha/(alpha+beta), so the expected value should be $100 (3/5)=$60. The item went for $50 -- so everyone in the audience must have been risk averse, loss averse, financially illiterate, or liquidity constrained (or some combination, like me.) A bottle of wine from Professor David Card's vineyard was the highest-priced item, going for $240.
The most creative item was donated by grad student Kaushik Krishnan. He collected and printed all of Brad DeLong's "Liveblogging World War II" blog posts and put them into a binder, which he promises to get signed by DeLong next time he's in Berkeley. If I remember right, that went for around $40.
Showing posts with label Yuriy Gorodnichenko. Show all posts
Showing posts with label Yuriy Gorodnichenko. Show all posts
Wednesday, April 17, 2013
Saturday, January 12, 2013
Monetary Policy and Inequality
Technical statistical details don't usually make headlines, but in Britain they have, and for good reason. The Office for National Statistics (ONS) announced that they would not change the way they calculate the Retail Prices Index (RPI), the country's oldest measure of inflation. A change to the RPI was expected because the formula used to calculate it is widely recognized as flawed.
The Consumer Price Index (CPI) is the price index used for inflation targeting and other macroeconomic purposes. It was introduced in the 1990s and is calculated in a similar fashion across countries. Compared to the CPI, the RPI tends to be higher by around 1.3 percentage points. Why does this upward bias matter? The RPI is used as the price index for inflation-linked government bonds and for many company pension payments. If the ONS had changed the formula, pensioners and holders of these bonds would have received lower future payments. Pensioners tend to be older, so some groups representing older people lobbied against the change. Of course, other people would have benefited from the change, namely some companies and taxpayers who are financing these pensions and bonds.
This actually brings up a broader point about monetary policy. Protection against inflation varies significantly across the population, so monetary policy is redistributive. People don't all experience inflation in the same way. It depends on the share of their income that comes from labor income versus financial income and also on the proportion of their assets indexed to inflation. Moreover, some people's wages are indexed to inflation or at least respond quickly to inflation, while other wages are "stickier." And as illustrated by the RPI situation, even inflation-linked assets may not perfectly track inflation dynamics. Age, income, employment status, and asset holdings all play a role in determining how monetary policy affects a person.
My adviser Yuriy Gorodnichenko and several coauthors have a recent paper called "Innocent Bystanders? Monetary Policy and Inequality in the U.S." They note that there are several theoretical channels through which monetary policy can affect income inequality. For example, if low-income households tend to hold relatively more currency than high-income households, then increased inflation would create a transfer from low-income households toward high-income households. Some of the channels predict that monetary policy will increase inequality, while other channels predict that monetary policy will decrease inequality. So a priori, the effect of monetary policy on inequality is ambiguous. Through careful empirical work, they are able to determine which channels are strongest. They find that monetary policy accounts for about 10-20% of the increase in inequality since the 1980s. In particular, contractionary monetary policy shocks "have effects on labor earnings which vary systematically across the income distribution: labor income rises at the upper end of the distribution and falls at the lower end." (Their empirical results apply to the United States, not to Britain, where the relative strength of the various channels could be different.) Considering the redistributive impacts of monetary policy, not just its overall impact on GDP, is an important challenge.
The Consumer Price Index (CPI) is the price index used for inflation targeting and other macroeconomic purposes. It was introduced in the 1990s and is calculated in a similar fashion across countries. Compared to the CPI, the RPI tends to be higher by around 1.3 percentage points. Why does this upward bias matter? The RPI is used as the price index for inflation-linked government bonds and for many company pension payments. If the ONS had changed the formula, pensioners and holders of these bonds would have received lower future payments. Pensioners tend to be older, so some groups representing older people lobbied against the change. Of course, other people would have benefited from the change, namely some companies and taxpayers who are financing these pensions and bonds.
This actually brings up a broader point about monetary policy. Protection against inflation varies significantly across the population, so monetary policy is redistributive. People don't all experience inflation in the same way. It depends on the share of their income that comes from labor income versus financial income and also on the proportion of their assets indexed to inflation. Moreover, some people's wages are indexed to inflation or at least respond quickly to inflation, while other wages are "stickier." And as illustrated by the RPI situation, even inflation-linked assets may not perfectly track inflation dynamics. Age, income, employment status, and asset holdings all play a role in determining how monetary policy affects a person.
My adviser Yuriy Gorodnichenko and several coauthors have a recent paper called "Innocent Bystanders? Monetary Policy and Inequality in the U.S." They note that there are several theoretical channels through which monetary policy can affect income inequality. For example, if low-income households tend to hold relatively more currency than high-income households, then increased inflation would create a transfer from low-income households toward high-income households. Some of the channels predict that monetary policy will increase inequality, while other channels predict that monetary policy will decrease inequality. So a priori, the effect of monetary policy on inequality is ambiguous. Through careful empirical work, they are able to determine which channels are strongest. They find that monetary policy accounts for about 10-20% of the increase in inequality since the 1980s. In particular, contractionary monetary policy shocks "have effects on labor earnings which vary systematically across the income distribution: labor income rises at the upper end of the distribution and falls at the lower end." (Their empirical results apply to the United States, not to Britain, where the relative strength of the various channels could be different.) Considering the redistributive impacts of monetary policy, not just its overall impact on GDP, is an important challenge.
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