Research  

Abstract: Firms’ forecasts of their own future costs are central to the propagation of shocks into inflation. Using survey data on US firms, we establish five novel facts about these forecasts: they (1) are driven by idiosyncratic cost movements, (2) are overly sensitive to a firm’s own costs (a failure of rational expectations), (3) over-react consistently across time, sectors, and firm size, (4) incorporate cost movements slowly over time, and (5) under-react to aggregate shocks until costs move. We estimate a model of firms’ beliefs that is able to match these facts, and embed this in a New Keynesian model. The New Keynesian Phillips curve becomes less forward-looking and steeper, and we confirm this in external pricing data. Supply shocks are made more inflationary, because they hit costs quickly, leading firms’ beliefs to over-react, while demand shocks are made less inflationary, as firms fail to anticipate future wage pressure. We show that optimal monetary policy is less reliant on forward guidance and commitment, since it is difficult to move firms’ beliefs without first moving their costs. In contrast, current interest rates remain powerful, and may have lasting effects, suggesting a sharp optimal reaction to inflationary shocks. 

Abstract: When interest rates rise, fixed-rate mortgages generate a financial incentive for owners to keep their homes, creating “rate lock”. Does rate lock dampen the negative impact of rising interest rates on house prices? To estimate rate lock’s causal effect on market-level house prices, we instrument for the rate lock incentive in the outstanding local mortgage stock using unexpected family size shocks that induce moves at times with different mortgage rates. We find that when interest rates increased over 2021-23, a one standard deviation increase in the rate lock incentive, corresponding to a 0.3pp lower average outstanding mortgage rate, caused 2.6pp higher nominal house price growth. To understand the mechanism, we compare moves of owners who purchase homes just before and just after sharp mortgage rate increases. A 1pp lower outstanding mortgage rate reduces moves from owning to renting by 33%, a force increasing the price-to-rent ratio, and reduces overall moves by 42%. Using these estimated effects on mobility, we calibrate a dynamic structural model to quantify how much rate lock offsets the negative aggregate price effects of a higher cost of capital. Model simulations indicate that the 2021-23 tightening would have reduced the price-to-rent ratio by 9.1% with adjustable-rate mortgages, and hence no rate lock, versus only 3.5% with fixed-rate mortgages. Rate lock thus dampens, but does not fully offset, negative price effects of higher interest rates. 

SSRN working paper (December 2024): https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5075679

Abstract: Markets, likened to an invisible hand, often appear to contradict econometric assumptions that rule out spillovers of one person’s treatment on another’s outcomes.  This paper provides a simple statistical framework highlighting that controls are indirectly affected by the treatment through the market.  Further, the effect of the treatment on the treated reveals only part of the consequence for the treated of treating the entire market.  When combined with economic theory, our framework leads to a new application of Marshall’s Laws of Derived Demand that relates econometric estimates of treatment effects in the marketplace to the substitution and scale effects of demand theory.  We show how treatment-effect estimators can diverge – both in magnitude and direction – from the causal effects of treatment on the treated or counterfactual policies treating all market participants.  The framework shows how the consequences of targeted treatments reveal the effects of marketwide treatments, and the role of market frictions in that inference.  Examples from labor, public finance, economic geography, development, and the macro literature on the “missing intercept” are provided.

NBER working paper: A Market Interpretation of Treatment Effects | NBER 

FEDS working paper: The Fed - A Market Interpretation of Treatment Effects

Previous Version: Difference-in-Differences in the Marketplace (NBER: Difference-in-Differences in the Marketplace | NBER, FEDS: The Fed - Difference-in-Differences in the Marketplace)

Abstract: How fully and quickly do supply chains transmit commodity price movements into inflation? In a production network with sticky prices, we show that the network delays full propagation of commodity price shocks to downstream firms. This delay from downstreamness occurs even when firms are forward-looking, and myopia amplifies it. We confirm the theory using shift-share designs exploiting firms' differential exposures to commodities through their networks. We find forward-looking responses to oil price movements but myopic responses for other commodities. Applying our model, we show that delayed network propagation of oil price movements forecasts the future path of core inflation.

SSRN working paper: Delayed Inflation in Supply Chains: Theory and Evidence by Robert Minton, Brian Wheaton :: SSRN 

NBER 2024 Economics of Supply Chains Talk: 2024 Economics of Supply Chains, Robert Minton, "Delayed Inflation in Supply Chains: Theory and Evidence" | NBER 

Abstract: We argue that wage rigidity induced by the minimum wage is an important channel for the transmission of monetary policy.  Intuitively, while expansionary monetary policy leads flexible prices to increase, the nominal minimum wage is held fixed by legislation and therefore falls in real terms. We present empirical evidence that the effect of monetary policy on employment is significantly larger in states with a high cost share of minimum wage workers. This result is robust a wide variety of specifications, including allowing for state-specific and time-varying effects of monetary policy, adding a Bartik control capturing employment changes driven by states' differing industry compositions, and instrumenting the minimum wage cost share with the state's legislated minimum wage.  In our preferred specification, this channel accounts for 39% of the total effect of monetary policy when the minimum wage cost share is high. Verifying the mechanism, we find larger effects of monetary policy on near-minimum-wage employment relative to higher-wage employment.  We conclude that declining minimum wage shares have reduced the efficacy of monetary policy, and more generally that rigid wages are a crucial channel through which monetary policy operates.

Abstract: We study whether minimum wage changes affect state-to-state migration flows in the United States – a revealed preference approach to whether a state’s low-wage workers find the state’s minimum wage increases to be beneficial. First, we use a model of migration and minimum wages to show that an increase in the minimum wage causes net migration to decline when firms are competitive and to rise when firms are monopsonistic. Second, we assess which of these predictions is more consistent with the data. Using the American Community Survey and the Current Population Survey, we observe the migration patterns of individuals and develop a machine learning algorithm to predict the wages they would earn if working prior to moving. Focusing on individuals predicted to earn no more than $3 above the minimum wage, we apply four distinct research designs (state- and federally-induced difference-in-differences and triple-differences) and find robust evidence that a $1 minimum wage increase leads to a 1.5 percentage point increase in net migration. This accords with the monopsonistic case of the model. Consistent with moving costs deterring changes in residence, we find that the effect is driven by declines in outmigration from states that increase their minimum wages.