Heterogeneous beliefs, new pricing models and the Phillips curve

Heterogeneous expectations and the Phillips curve

In this paper Meeks and Monti develop a modified Phillips curve in which the distribution of heterogeneous beliefs may give rise to additional effects on inflation from expectations. They estimate the expectations-augmented Phillips curve using complete sets of household inflation forecasts reported in the US Michigan survey, and in a new UK household survey. They show that in both regions, signals about future inflation contained in the distribution of beliefs, and not just  its mean, affect current inflation. The effects can be quantitatively substantial. Their findings include:

• There are three factors, namely disagreement, skew, and ‘shape’, which jointly characterize much of the variation present in beliefs.
• The usual approach of summarizing survey beliefs by a single ‘consensus’ or average forecast is a misspecification.
• The contribution of heterogeneous beliefs to inflation is estimated to be largest at times of macroeconomic disruption, such as changes in monetary regimes, the global financial crisis, and the Covid-19 pandemic.

Heterogeneous beliefs and the Phillips curve
Authors: Roland Meeks, Francesca Monti
From: International Monetary Fund, King’s College London

New pricing models and the Phillips curve

From the abstract:

We show that, in a broad class of menu cost models, the dynamics of aggregate inflation in response to arbitrary shocks to aggregate costs are nearly the same as in Calvo models with suitably chosen Calvo adjustment frequencies. We first prove that the canonical menu cost model is first-order equivalent to a mixture of two time-dependent models, which reflect the extensive and intensive margins of price adjustment. We then show numerically that, in any plausible parameterization, this mixture is well-approximated by a single Calvo model. This close numerical fit carries over to other standard specifications of menu cost models. Thus, the Phillips curve for a menu cost model looks like the New Keynesian Phillips curve, but with a higher slope.

New Pricing Models, Same Old Phillips Curves?
Authors: Adrien Auclert, Rodolfo D. Rigato, Matthew Rognlie, Ludwig Straub
From: Stanford University, Northwestern University, Harvard University