The Optimal Inflation Target: Bridging the Gap between Theory and Practice, with Henning Weber, June 2024, forthcoming in: The Research Handbook of Monetary Policy (edited by G. Ascari and R. Trezzi).

Traditional economic forces result in optimal infaltion targets that are either zero or
negative, contrary to the goals set by central banks. We surves new economic forces justifying positive targets, including: (i) trends in relative prices, (ii) the lower bound constraint
on nominal interest rates, (iii) (downward) wage rigidity, and (iv) effects of
product entry and aggregation. We also identify areas for future research on optimal inflation.


Inflation Distorts Relative Prices: Theory and Evidence
with Andrey Alexandrov and Henning Weber, updated version: May 2024

Using a novel identification approach derived from sticky price theories with time or state-dependent adjustment frictions, we empirically identify the effect of inflation on relative price distortions. The approach can be directly applied to micro price data, does not rely on estimating the gap between actual and flexible prices, and only assumes stationarity of unobserved shocks.
 

Subjective Housing Expectations, Falling Natural Rates and the Optimal Inflation Target 
with Oliver Pfaeuti and Timo Reinelt,  Revise & Resubmit Journal of Monetary Economics, updated June 2024 

The paper documents a number of dimension along which how housing price expectaitons deviate from rational expectations. It then shows that these deviations and the behavior of housing prices can be jointly explained by capital gain extrapolation. Embedding capital gain extraplation into sticky price model with a lower bound, we show how lower natural rates give rise to monetary policy implications that differ substantially from the ones implied by rational housing price expectations. 



Overconfidence in Private Information Explains Biases in Professional Forecasts, with Pei Kuang and Shihan Xie, preliminary version, April 2024

We observe a rich set of public information signals available to participants in the Survey
of Professional Forecasters (SPF) and decompose individual forecast revisions into those due to public information and residual information. We show that SPF forecasters overreact to residual information overly anchored to prior beliefs. This holds true for almost all forecast horizons and variables. We show that overconfidence in private information explains both of these features; it also explains the deviations in Coibion & Gorodnichenko (2015) and Bordalo et al. (2020).


 

Markups and Marginal Costs over the Firm Life: Implications for the Optimal Inflation Target, with Tobias Renkin and Gabriel Zuellig, October 2023 (preliminary version) 
 
We estimate the dynamics of relative markups, marginal costs and prices over the firm
life cycle using detailed firm data from Denmark. Relative marginal costs fall strongly
over the first 15 years of firm life, but relative prices fall only weakly due to a strong
rise in relative markups. Relative price trends thus underestimate trends in relative
productivity. This distorts recent estimates of the optimal inflation target downward
by 0.2-1.2% per year. We show that relative markups increase following the introduc-
tion of new products and the discontinuation of old products.  


Stock Prices Cycles and Business Cycles, with Sebastian Merkel, June 2019

We present a simple RBC model that jointly replicates the behavior of stock prices and business cycles. The model predicts that low interest rates make stock price boom-bust cycles more likely and that these cycles are triggered by a sequence of positive productivity surprises.