Ricardo Reis

Research

Ordered by topic with brief description (Last updated: January 2009, so will be outdated). Can see ordered by publication status.

My research work so can be grouped into 4 topics (or questions).

1) Inattentiveness and Sticky Information

Economic choices are subject to constraints. The three constraints that research has mostly focused on are: budget constraints in purchasing, technological constraints in producing, and information constraints in contracting. The model of inattentiveness acknowledges that attention is also constrained, in that there are costs of acquiring, absorbing and processing information when making decisions.
In [1] and [2], I modeled these costs explicitely, and solved for the optimal behavior of consumers and firms in response to them. This is the model of "inattentiveness" where it is optimal to only sporadically update information and remain inattentive in between these adjustment times. Under some strict conditions, this optimal behavior may lead to an exponential distribution of adjustment dates. Assuming inattentiveness and this particular distribution (or a Poisson arrival of planning dates) leads to the "sticky-information" model.
In [3], we studied the behavior of price-setters under sticky-information and derived a sticky-information Phillips curves. In [2] and [3], we showed that several facts on inflation dynamics and its correlation with output are well explained by the model. In [4], we looked at the behavior of wage-setters under sticky information, and noted that it could account for some features of the joint dynamics of unemployment and inflation. In [1], I noted that several disparate facts on the macro and micro literatures on consumption can be accounted for by inattention. Looking at new data, in [5] we showed that sticky information could explain some fascinating new facts on the disagreement over inflation expetactions in the U.S. data.
In [6] and [7], we worked towards the general equilibrium of an economy when all agents are inattentive. Workers, consumers and firms all update information sporadically and interact in markets. In [8], this work was completed in the form of a sticky information general equilibrium (SIGE) model, estimated for both the U.S. and the Euro-area, that could be used for realistic policy exercises. In [9], I numerically studied the performance of different policy rules in these estimated models. Instead in [10], we analytically characterized optimal policy but only for the case where only firms are inattentive.

[1] Inattentive Consumers. Journal of Monetary Economics, 53 (8), 1761-1800, 2006.
[2] Inattentive Producers. Review of Economic Studies, 73 (3), 793-821, 2006.
[3] Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve, with N. Gregory Mankiw. Quarterly Journal of Economics, 117 (4), pp. 1295-1328, 2002.
[4] Sticky Information: A Model of Monetary Non-neutrality and Structural Slumps, with N. Gregory Mankiw. In: Knowledge, Information, and Expectations in Modern Macroeconomics: In Honor of Edmund S. Phelps, edited by P. Aghion, R. Frydman, J. Stiglitz and M. Woodford, Princeton: Princeton University Press, 64-86, 2003.
[5] Disagreement about Inflation Expectations, with N. Gregory Mankiw and Justin Wolfers. NBER Macroeconomics Annual 2003, Cambridge, MIT Press, 18, 209-248, 2004.
[6] Pervasive Stickiness, with N. Gregory Mankiw. American Economic Review, 96 (2), 164-169, 2006.
[7] Sticky Information in General Equilibrium, with N. Gregory Mankiw. Journal of the European Economic Association, 5 (2-3), 2007.
[8] A Sticky-Information General-Equilibrium Model for Policy Analysis Forthcoming, 2009.
[9] Optimal Monetary Policy Rules in an Estimated Sticky-Information Model Forthcoming, 2009.
[10] Monetary Policy for Inattentive Economies, with Laurence Ball and N. Gregory Mankiw. Journal of Monetary Economics, 52 (4), 703-725, 2005.

2) Dynamic Measures of Inflation

Economists use measures of inflation every day, whether to deflate some nominal variables into their "real" counterparts, to guide monetary policy, or to measure the cost of living. Most of the theory on price indices is based on static models, even though modern macroeconomics deals almost exclusively with dynamics. My research on this area uses the fundamental insight from economic price index theory---that price indices are duals to economic choice problems---to use dynamic models in order to come up with dynamic measures of inflation.
In [11], we used a model of dynamic nominal rigidities to ask: what is the optimal inflation target for a central bank? We called it the SPI (for Stability Price Index), derived its properties in theory and showed that it gives a large weight to wages in the United States. In [12], I calculated the cost of living for a consumer that faces uncertainty and lives for many periods. I called it the DPI (for Dynamic Price Index), showed its surprising theoretical properties, and calculated it for a U.S. household that wants to index the value of its retirement account.
In [13], we calculated the own-price of money, that is the absolute change in goods' prices or the change in the value of the numeraire, to get an NPI (for Numeraire Price Index). In [14], we separated changes in goods prices' into a relative-price component and a measures of "pure inflation": the equiproportional change in all goods' prices that is uncorrelated with any relative-price changes at any date. We showed that the Phillips correlation bwteen real acticity and inflation is almost entirely explained by changes in relative prices. Or, in other words, that pure inflation is uncorrelated with real activity agasint theories of money illusion and in favor of theories of nominal rigidites in goods' prices.

[11] What Measure of Inflation Should a Central Bank Target? with N. Gregory Mankiw. Journal of the European Economic Association, 1 (5), 1058-1086, 2003.
[12] A Dynamic Measure of Inflation. Working paper, 2009
[13] Measuring Changes in the Value of the Numeraire, with Mark W. Watson. Working paper, 2007.
[14] Relative Goods' Prices, Pure Inflation, and the Phillips Correlation , with Mark W. Watson. Working paper, 2008.

3) Persistence and its implications

Most macroeconomic time-series are very persistent. In this research, I noted that some current debates have persistence at their center.
In [15], we measured the persistence of inflation, and found that it is high and close to unchanged from 1965 to 2001. There was a debate around this a few years ago, but now that the dust settled, many seem to agree with this (and a new interesting hypothesis is emerging that there have been changes instead in the persistence of "inflation-gaps"). In [16], I noted that in the Barro-Gordon model, a workhorse in monetary policy analysis, one can generate inflation persistence if there is uncertainty and gradual learning about the natural rate of unemployment.
In [17], I showed that assuming that consumption fluctuations are persistent (and not white noise as Lucas assumed) can raise the costs of fluctuations by one to two orders of magnitude. Using a variety of methods to accurately measure persistence, I obtained more reliable measures of the costs of fluctuations. In [18], we showed that the typical persistence of the output drop following a banking crises leads to much higher costs of crises than those calculated using fiscal measures.
In [19], we exhaustively showed a new business cycle fact: expansions and contractions in output are equally brief and violent, but contractions in employment are briefer and more violent than expansions (they differ because employment typically lags output at peaks but they roughly coincide in their troughs). Therefore, employment is particularly persistent and sluggish when rising, but quick and sharp at falling.

[15] The Persistence of Inflation in the United States, with Frederic Pivetta. Journal of Economic Dynamics and Control, 31 (4), 1326-1358, 2007.
[16] Where Is the Natural Rate? Rational Policy Mistakes and Persistent Deviations of Inflation from Target. Advances in Macroeconomics, 3 (1), article 1, 2003.
[17] The Time-Series Properties of Aggregate Consumption: Implications for the Costs of Fluctuations. Journal of the European Economic Association, 7 (4), xxx-xxx, 2009.
[18] Costs of banking system instability: some empirical evidence, with Glenn Hoggarth and Victoria Saporta. Journal of Banking and Finance, 26 (5), 825-855, 2002.
[19] The Brevity and Violence of Contractions and Expansions, with Alisdair McKay. Journal of Monetary Economics, 55(4), 2008.

4) Odds and ends

In [20], we surveyed the legacy of Alan Greenspan as chairman of the FOMC. In [21], I derived the exact analytical conditions under which, in models with capital accumulation and money in the utility function (Sidrauski models), monetary policy is neutral or not. In [22], I showed that with enough freedom about policy rules, the neoclassical model of fiscal policy has few testable predictions, and proposed a new procedure to identify these models.

[20] Understanding the Greenspan Standard, with Alan S. Blinder. In: The Greenspan Era: Lessons for the Future, Jackson Hole: Federal Reserve Bank of Kansas City, 11-96 2005.
[21] The Analytics of Monetary Non-Neutrality in the Sidrauski Model. Economics Letters, 94 (1), 129-135, 2007.
[22] Using VARs to Identify Models of Fiscal Policy: A Comment on Perotti. NBER Macroeconomics Annual 2007, 22, 227-236, 2008.