Product Quality, Measured Inflation and Monetary Policy, 2021 (with Rodnyansky & Van der Ghote):
Abstract: This paper proposes a tractable New Keynesian (NK) economy with endogenous adjustment in product quality that nests the canonical framework. Endogenous quality choice reduces the slope of the traditional NK Phillips curve and also amplifies the economy’s response to productivity shocks. This leads to a less reactionary monetary policy where model misspecification of imperfectly observable quality adjustments matters more for macroeconomic stabilization than the mismeasurement of those adjustments. With no misperception of product quality by the monetary authority, the principles for optimal monetary policy are, nonetheless, unchanged as the quality extensions to the canonical NK model preserve divine coincidence.
[Full Paper – Coming Soon!]
The Rise of Harrod-Balassa-Samuelson, 2021:
Abstract: I begin this paper by documenting two stylised facts. Firstly, over the past 70 years the positive cross-country relationship between aggregate consumer prices and real output per capita has strengthened (i.e. a rise in the Harrod-Balassa-Samuelson effect). This is demonstrated using data from the Penn World Tables. Secondly, border frictions have increased over the same time frame, with international borders effectively becoming wider and an increasing failure of the Law of One Price (LOOP). I construct my own dataset of city-level relative prices using national sources across four continents to document the increasing failure of the LOOP. I then use a two-country endowment model with a domestic distribution services sector to construct an equilibrium failure of the LOOP. An increase in the relative size of the distribution services sector can simultaneously explain both stylized facts, while the standard explanation (a higher share of non-traded goods) may only explain the first. Finally, I extend the model to include production by monopolistically competitive firms, before solving and calibrating the model to broadly replicate the two stylised facts.
[Full Paper – Coming Soon!]
The Impact of Large Scale Asset Purchases on Wealth Inequality, 2021:
Abstract: In this paper I consider the impact of changes in the size and composition of the central bank’s balance sheet on household wealth inequality through the financial portfolio rebalancing channel of monetary policy transmission. A model with multiple assets (of differing liquidity) and heterogeneous agents, who experience idiosyncratic labour productivity shocks, is used to demonstrate that an expansion of the central bank’s balance sheet can materially alter the distribution of wealth, causing inequality to increase, while even extreme changes in the composition have little effect. When the model is calibrated to match the Federal Reserve’s Large Scale Asset Purchases, wealth inequality increases by 6.9%, as measured by the Gini coefficient.
[Full Paper – Coming Soon!]
Short Topical Notes for Teaching
Optimal Covid-Contractions, 2020
In this short note, I show how the standard undergraduate textbook model of monetary policy may be used to uncover back-of-the-envelope estimates for two of the most important policy parameters today, namely the willingness and ability of countries to forgo current income to reduce the spread of Covid-19. The data are consistent with a social weight on reducing excess deaths over 20 times that of output stabilisation (willingness), while a contraction in GDP of 1% helps to reduce excess deaths by around 0.6% of the population (ability).
What Would Be The Consequences of a “Sudden Stop” UK Current Account Reversal?, 2018
As the UK-government’s negotiations with the EU over possible trade deal continue to suggest Brexit will deliver a meaningful break from current relationships, this short note considers the implications this may have for the UK current account and international financing of UK-borrowing. Following the classical macroeconomic trade literature in analysing the joint behaviour of the current account and real exchange rate, I show that a UK current account reversal (however this arises) is likely to be associated with a real exchange rate depreciation of around 22%, while the UK terms of trade deteriorate by around 8%.
Dan Wales 