Yuriy Gorodnichenko | Macro Paper Warehouse

Information and the Formation of Inflation Expectations by Firms: Evidence from a Survey of Israeli Firms

Thu, 01 Jan 2026 00:00:00 +0000

Research question and motivation. How do firms form and update inflation expectations during a monetary-policy regime change and a transition from high/volatile inflation to a low, stable, inflation-targeting environment? This matters because tracking and managing expectations is central to modern monetary policy (especially under forward guidance), yet high-quality firm-level expectations data—particularly across regime changes—are scarce (Bernanke 2007). A central tension in the literature is that firms and households in long-stable advanced economies are largely inattentive to inflation and monetary policy, plausibly because successful stabilization removes the incentive to monitor them. Israel offers a natural experiment: its recent history of high inflation and dollarization, followed by disinflation, de-dollarization, and the anchoring of expectations at the ~2% target midpoint around 2003.

Resource Misallocation in European Firms: The Role of Constraints, Firm Characteristics and Managerial Decisions

Thu, 01 Jan 2026 00:00:00 +0000

This paper investigates why firms in the European Union exhibit wide dispersion in marginal revenue products (MRP) of capital and labor — a direct indicator of resource misallocation — and asks how much aggregate productivity the EU forfeits as a result. The research question is motivated by the persistent productivity gap between the EU and the United States, by evidence that within-country MRP dispersion in Europe has been trending upward since the mid-1990s, and by an institutional context in which the EU single market (launched in 1993) has not eliminated cross-country factor market frictions even three decades later.

Demand Stimulus as Social Policy

This paper estimates the distributional and social consequences of Department of Defense (DOD) contract spending using a city-level (CBSA) panel dataset spanning 2005–2016. The research question is whether demand stimulus — specifically DOD spending, the largest category of U.S. discretionary government spending — has differential effects across demographic groups and whether it improves social outcomes typically targeted by dedicated government programs. A secondary question is whether these effects are specific to DOD spending or common to any demand shock.

Tell Me Something I Don't Already Know: Learning in Low- and High-Inflation Settings

This paper uses randomized control trials (RCTs) applied over time in multiple countries to study whether the economic environment — specifically the level of inflation — affects how agents learn from new information. The main finding is that as inflation rose in advanced economies, both households and firms became more attentive to and informed about publicly available news about inflation, causing them to respond less to exogenously provided information about inflation and monetary policy in the RCT treatments. When agents are already well-informed about the current inflation environment (because high inflation makes it salient), additional information provision moves their beliefs less — the marginal value of information is decreasing in prior attentiveness. Complementary evidence from Uruguay (persistently high inflation) and New Zealand (persistently low inflation) confirms the cross-sectional pattern: agents in high-inflation environments have stronger priors and respond less to information treatments. The results imply that central bank communication interventions are more effective during low-inflation periods when agents are less informed.

The Optimal Inflation Rate in New Keynesian Models: Should Central Banks Raise Their Inflation Targets in Light of the Zero Lower Bound?

This 2012 Review of Economic Studies paper by Olivier Coibion, Yuriy Gorodnichenko, and Johannes Wieland asks what rate of steady-state (trend) inflation maximizes welfare in a New Keynesian DSGE model once the zero lower bound (ZLB) on nominal rates is explicitly modeled, rather than assumed away. The authors build a medium-scale NK model with Calvo staggered price-setting, habit formation in consumption, and a Taylor rule truncated at the ZLB, solving for ZLB episodes’ endogenous duration using the Bodenstein-Erceg-Guerrieri (2009) nonlinear algorithm; they calibrate the model to standard U.S. moments and to the historical post-WWII frequency of ZLB episodes, and evaluate welfare via a second-order approximation to utility that decomposes into a steady-state term (from Calvo price dispersion) and variance terms in the output gap, inflation, and consumption. In the baseline calibration the optimal trend inflation rate is 1.5% per year – “close to the bottom end” of the 1-3% target ranges central banks commonly use – because, although each ZLB episode is individually costly (an 8-quarter ZLB spell costs the equivalent of a 6.2% permanent consumption loss at 2% trend inflation), such episodes are calibrated to occur only about once every 20 years at 2% inflation, so the unconditional expected cost of the ZLB is small (0.08% of permanent consumption) relative to the perpetual costs of higher trend inflation (steady-state price dispersion, and a previously unidentified channel by which higher trend inflation makes inflation volatility itself more costly). The optimal rate proves robust to a wide range of alternative calibrations and extensions – remaining under about 3% even when the output-gap loss weight is scaled up 100-fold, capital is added (2.1%), parameter uncertainty is incorporated (1.9%, 90% CI [0.3%, 2.9%]), or the historical ZLB frequency is tripled – with the risk-premium shock’s persistence being the single most sensitive parameter (raising optimal inflation from 1.5% to 3% when its autocorrelation rises from 0.947 to 0.96). The rate is highly sensitive to the assumed monetary and fiscal policy regime, however: optimal inflation falls to about 0.2% under commitment to a stabilization policy, rises to 2.7% under discretion, and falls to well under 0.3% under even a modest price-level-targeting response, and it falls further still, to 0.3%, if downward nominal wage rigidity is added to the model. The authors caveat that their cashless-economy setup ignores the Friedman optimal-deflation motive and seigniorage, and that omitting endogenous countercyclical fiscal policy during ZLB episodes likely overstates both the cost of the ZLB and the resulting optimal inflation rate.

Why Are Target Interest Rate Changes so Persistent?

This 2012 American Economic Journal: Macroeconomics paper by Olivier Coibion and Yuriy Gorodnichenko adjudicates between two observationally similar explanations for the federal funds rate target’s very high persistence (an estimated AR(1) coefficient of roughly 0.9-0.99 in typical Taylor-rule regressions): deliberate interest-rate smoothing (policy inertia, modeled as partial adjustment toward a Taylor-rule target) versus serially correlated monetary policy shocks (unexplained deviations from the Taylor rule that themselves carry over from meeting to meeting). Using real-time Federal Reserve Greenbook forecasts of inflation and the output gap – treated as the best available measure of the Fed’s actual information set at each decision, released only with a five-year publication lag – over a 1987:IV-2006:IV quarterly sample bounded by Greenbook availability and ending before the zero lower bound, the paper estimates a sequence of nested Taylor-rule specifications. A simple specification nesting a smoothing parameter and a persistent-shock parameter in a single AR(1) finds both statistically significant (smoothing coefficient about 0.81, shock persistence about 0.46), and the paper concludes that this simple nested specification cannot overwhelmingly differentiate between the two explanations. But once the paper generalizes to higher-order AR(p) smoothing and AR(q) shock lags and lets the Bayesian information criterion (BIC) select among the resulting grid of specifications, the selected model is robustly IS(2), AR(0) – two lags of interest-rate smoothing and no persistent-shock lags – across the full sample and pre-/post-2000 subsamples; under a richer AR(2)-smoothing-plus-AR(2)-shock specification the smoothing coefficients remain large and significant (summing to roughly 0.75-0.95) while the shock-persistence terms turn insignificant at the first lag and negative and significant at the second. The paper corroborates this with an instrumental-variables strategy that instruments the lagged rate with non-monetary shocks (oil prices, technology, fiscal policy) to address possible endogeneity, yielding smoothing estimates of 0.70-0.87; with a Rudebusch (2002)-style predictability test showing Greenbook forecasts (rather than Eurodollar futures) predict future target changes at 2- and 3-quarter horizons with R-squared of 20% and 12%, consistent with genuine smoothing; with checks showing financial conditions, forecast revisions, and time-varying-inflation-target measures cannot fully account for the estimated smoothing; and with narrative evidence – Greenspan’s 1994 stated preference for 25-basis-point increments and Bernanke’s 2004 “Gradualism” speech – that Fed officials themselves describe deliberate gradual adjustment. A further implication is that the interest-smoothing interpretation implies a long-run inflation response exceeding one (satisfying the Taylor principle), whereas the no-smoothing persistent-shock interpretation implies a contemporaneous inflation response that can fall below one, a determinacy-violating result the smoothing interpretation avoids.