Golosov and Lucas recently argued that a menu-cost model, when made consistent with salient features of the microdata, predicts approximate monetary neutrality. I argue here that their model misses, in fact, two important features of the data. First, the distribution of the size of price changes in the data is very dispersed. Second, in the data many price changes are temporary. I study an extension of the simple menu-cost model to a multiproduct setting in which firms face economies of scope in adjusting posted and regular prices. The model, because of its ability to replicate this additional set of microeconomic facts, predicts real effects of monetary policy shocks that are much greater than those in Golosov and Lucas and nearly as large as those in the Calvo model. Although episodes of sales account for roughly 40% of all goods sold in retail stores, the model predicts that these episodes do not contribute much to the flexibility of the aggregate price level.

If pricing is state dependent, firms are more likely to adjust whenever aggregate and idiosyncratic shocks reinforce each other and trigger desired price changes in the same direction. Using measures of technology shocks derived from production function estimates for four-digit U.S. manufacturing industries, I find that sectoral inflation rates are more sensitive to negative, as opposed to positive, technology disturbances in periods of higher economy-wide inflation, commodity price increases, and expansionary monetary policy shocks. I argue, using a state-dependent sticky price model that matches salient features of the U.S. microprice data, that these results suggest that pricing is state-dependent in U.S. manufacturing.

We characterize optimal product market policy in an unequal economy in which firm ownership is concentrated and markups increase with firm market shares. We study the problem of a utilitarian regulator who designs revenue-neutral interventions in the product market. We show that optimal policy increases product market concentration. This is because policies that encourage larger producers to expand improve allocative efficiency, increase the demand for labour and equilibrium wages. We derive these results both in a static Mirrleesian setting in which we impose no constraints on the shape of interventions, as well as in a dynamic economy with wealth accumulation. In our dynamic economy optimal policy reduces wealth and income inequality by redistributing market share and profits from medium-sized businesses, which are primarily owned by relatively rich entrepreneurs, to larger diversified corporate firms.

We use producer-level data to evaluate the role of financial frictions in determining total factor productivity (TFP). We study a model of establishment dynamics in which financial frictions reduce TFP through two channels. First, finance frictions distort entry and technology adoption decisions. Second, finance frictions generate dispersion in the returns to capital across existing producers and thus productivity losses from misallocation. Parameterizations of our model consistent with the data imply fairly small losses from misallocation, but potentially sizable losses from inefficiently low levels of entry and technology adoption.

We study the severity of liquidity constraints in the U.S. housing market using a life-cycle model with uninsurable idiosyncratic risks in which houses are illiquid, but agents can extract home equity by refinancing their mortgages. The model implies that four-fifths of homeowners are liquidity constrained and willing to pay an average of 13 cents to extract an additional dollar of liquidity from their home. Most homeowners value liquidity for precautionary reasons, anticipating the possibility of income declines and the need to make mortgage payments. The model reproduces well the observed response of consumption to tax rebates and mortgage relief programs and predicts large welfare gains from policies aimed at providing temporary liquidity relief to homeowners.

We use firm-level data to document that private businesses experience large fluctuations in their profit shares. These are due to large, fat-tailed, and transitory changes in output that are not fully accompanied by changes in their inputs. We interpret this evidence using a model of entrepreneurial dynamics. Because firms can limit their exposure to risk by operating at a smaller scale, our model predicts large macroeconomic losses from uninsurable business risk, much larger than those stemming from credit constraints. While self-financing allows entrepreneurs to quickly overcome credit constraints, even wealthy entrepreneurs remain considerably exposed to risk.

Real rigidities that limit the responsiveness of real marginal cost to output are a key ingredient of sticky price models necessary to account for the dynamics of output and inflation. We argue here, in the spirit of We study a menu cost economy in which firms hold inventories in order to avoid stockouts and to economize on fixed ordering costs.

We evaluate and partially challenge the household leverage view of the Great Recession. In the data, employment and consumption declined more in U.S. states where household debt declined more. We study a model of a monetary union composed of many regions in which liquidity constraints shape the response of employment and consumption to changes in debt. We estimate the model with Bayesian methods combining state and aggregate data. Changes in household credit explain 40% of the differential rise and fall of employment across states, but a small fraction of the aggregate employment decline in 2007–2010. Nevertheless, since household deleveraging was gradual, credit shocks greatly slowed the recovery.

Changes in household debt and employment across regions of the U.S. during the Great Recession are highly correlated: regions where the decrease in household debt was most pronounced were also regions where the decline in employment was most severe. We show that the drop in employment in the regions that have experienced the largest decrease in household debt is mostly accounted for by changes in the labor wedge (deviations from a static consumption-leisure choice) as opposed to changes in real wages. We argue that such a pattern is consistent with fluctuations in debt constrain01/2ts in a standard Bewley-Aiyagari model.

We study the procompetitive gains from international trade in a quantitative model with endogenously variable markups. We find that trade can significantly reduce markup distortions if two conditions are satisfied: (i) there is extensive misallocation, and (ii) opening to trade exposes hitherto dominant producers to greater competitive pressure. We measure the extent to which these two conditions are satisfied in Taiwanese producer-level data. Versions of our model consistent with the Taiwanese data predict that opening up to trade strongly increases competition and reduces markup distortions by up to one-half, thus significantly reducing productivity losses due to misallocation.