Discussion of "Learning by Doing in New Firms and the Optimal Rate of In‡ation" by Henning Weber 2nd Bundesbank Task Force on Monetary Transmission

Vivien Lewis

Deutsche Bundesbank (Financial Stability)

30th January 2015

V. Lewis ()

Discussion Weber

30th January 2015

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Paper Summary Motivation Productivity growth higher in new …rms relative to old ones Implications for price setting and optimal in‡ation rate? This paper Sticky-price model with: Firm entry and exit Productivity growth Learning-by-doing in new …rms

Result Optimal long run in‡ation rate is positive (1%) Without learning-by-doing, optimal in‡ation is instead negative

V. Lewis ()

Discussion Weber

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Assessment and Outline Great paper! Empirical motivation; policy relevance; interesting result State-of-the-art analysis; well written text; clear focus Outline of discussion Mechanism in a simpli…ed model Comments Trend in‡ation and price setting Size of distortions Intuition for main result Tax on labour supply

Conclusion

V. Lewis ()

Discussion Weber

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‘E¢ cient’vs ‘Calvo’Price Dispersion

Desired price in …rm i Pi = µ

W Ai

Two sources of price dispersion Productivity dispersion ) ‘e¢ cient’price dispersion Price staggering ) ‘Calvo’price dispersion Key distortion ‘E¢ cient’and ‘Calvo’price dispersion don’t coincide

V. Lewis ()

Discussion Weber

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Desired Firm-Level Price Change Desired real price in …rm i Pi w =µ , P Ai

where w =

W P

Suppose µ and w constant, take logs and …rst di¤erences ∆pi |{z}

=

desired …rm-level price change

Without trend in‡ation (π = 0)

π |{z}

trend in‡ation

giA |{z}

productivity growth

Productivity growth (giA > 0) ) desired price change is negative Higher productivity growth ) lower desired price change

V. Lewis ()

Discussion Weber

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Desired Average Price Change Suppose fraction λ of new …rms j

(1 |

λ)(∆pi ) + λ(∆pj ) = (1 {z }

λ)(π

giA ) + λ(π

gjA )

desired average price change

Desired average price change

∆p = π

(1

λ)giA

λgjA

Suppose incumbent …rms i have zero productivity growth giA = 0

) To stabilise desired prices (∆p = 0), need positive trend in‡ation π = λgjA V. Lewis ()

Discussion Weber

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Trend In‡ation (TI) and Price Setting Price setting decision (eq. 2) "

max ∑ κ Ωt,t +i Pjt i

Wt +i

P jt

1 + λλsjt +i at +i g sjt +i

!#

yjt +i ,

subject to yjt +i =

Pjt Pt +i

θ

yt +i

(How) does …rm take TI into account when setting a price? Ascari and Sbordone (2014) show how price setting is a¤ected by existence of TI Under staggering and TI, …rm has incentive to adjust price by more when it gets the chance

V. Lewis ()

Discussion Weber

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Size of Distortions

Express distortions in terms of consumption equivalents Maybe welfare loss giving rise to positive optimal LR in‡ation is small V. Lewis ()

Discussion Weber

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Intuition for Main Result

Why do we deviate from zero-optimal-in‡ation result? Optimal long run in‡ation without learning-by-doing, de‡ation (-0.5%) is optimal with learning-by-doing, in‡ation (1%) is optimal

But changing prices is costly! Schmitt-Grohe and Uribe (2004): price setting friction larger than monetary friction ) zero in‡ation beats Friedman Rule Why, in this paper, is tradeo¤ resolved in favour of in‡ation rate away from zero?

V. Lewis ()

Discussion Weber

30th January 2015

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Tax on Labour Supply Optimal long run in‡ation rate computed imposing τL =

1 1

θ

,

i.e. labor supply subsidy that sets markup to zero in standard New Keynesian model Why? This is not the optimal tax rate in present model: does not remove markup distortion (see panel A in Figure 3) Suggestion Use either zero labour tax or optimal labour tax (one distortion ) one instrument)

V. Lewis ()

Discussion Weber

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Conclusion

Overall Very nice piece of work! Suggestions Show that price setters take trend in‡ation into account Express distortions in term of consumption Provide more intuition for main result Check alternative labour tax rates

V. Lewis ()

Discussion Weber

30th January 2015

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References

Ascari, G. and A. Sbordone (2014), The Macroeconomics of Trend In‡ation. Journal of Economic Literature 52(3), 679-773. Schmitt-Grohe, S. and M. Uribe (2004), Optimal Fiscal and Monetary Policy under Sticky Prices. Journal of Economic Theory 114, 198–230.

V. Lewis ()

Discussion Weber

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Discussion of

Jan 30, 2015 - Under staggering and TI, firm has incentive to adjust price by more when it gets the chance. V. Lewis (). Discussion Weber. 30th January 2015.

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