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Abstract:
This paper examines the relationship between futures and spot prices for energy commodities. In particular, we examine whether futures prices are (1) an unbiased predictor of subsequent spot prices and (2) whether futures prices are a good predictor of subsequent spot prices, in the crude oil, gasoline, heating oil markets and natural gas markets. We find that while futures prices are unbiased predictors of future spot prices in the first three markets, they are also fairly inaccurate predictors. Natural gas futures prices are both a biased predictor of subsequent spot prices at two of three horizons examined, and a poor predictor.

futures, energy, forecasting, efficient markets hypothesis

Abstract:
This paper examines the relationship between spot and futures prices for energy commodities (crude oil, gasoline, heating oil markets and natural gas). In particular, we examine whether futures prices are (1) an unbiased and/or (2) accurate predictor of subsequent spot prices. We find that while futures prices are unbiased predictors of future spot prices, with the exception those in the natural gas markets at the 3-month horizon. Futures do not appear to well predict subsequent movements in energy commodity prices, although they slightly outperform time series models.

Abstract:
We consider a DSGE model in which firms follow one of four price-setting regimes: sticky prices, sticky-information, rule-of-thumb, or full-information flexible prices. We allow for each type of firm to coexist and interact via their respective price-setting decisions. The parameters of the model, including the fractions of each type of firm, are estimated by matching the moments of the observed variables of the model to those found in the data. We find that sticky-price firms account for a little over 50% of firms, with the remaining balance split almost evenly across flexible, rule-of-thumb, and sticky information firms. Importantly, strategic interaction across sectors changes the qualitative behavior of the inflation dynamics within each sector. The hybrid model is more than a simple weighted average of its components.

Heterogeneity, Price-setting, DSGE

Abstract:
I consider the empirical evidence for the sticky information model of Mankiw and Reis (2002) relative to the basic sticky price model, conditional on historical measures of inflation forecasts. Overall, the evidence is unfavorable to the sticky information model of price-setting: the estimated structural parameters are inconsistent with an underlying sticky information model and the sticky-information Phillips Curve is statistically dominated by the New Keynesian Phillips Curve. I find that the poor performance of the sticky information approach is driven by two key elements. First, predicted inflation in the sticky information model places substantial weight on old forecasts of inflation. Because these consistently underestimate inflation in the 1970s and overestimate inflation since the 1980s, particularly at long forecast horizons, predicted inflation from the sticky information model inherits these patterns. Second, predicted inflation from the sticky information model is excessively smooth.

Sticky Information, Expectations, Inflation

Abstract:
This paper examines the relationship between spot and futures prices for commodities, including those for energy (crude oil, gasoline, heating oil markets and natural gas), precious and base metals (gold, silver, aluminum, copper, lead, nickel and tin), and agricultural commodities (corn, soybean and wheat). In particular, we examine whether futures prices are (1) an unbiased and/or (2) accurate predictor of subsequent spot prices. We find that while energy futures prices are generally unbiased predictors of future spot prices, there are certain notable exceptions. For both base and precious metals, the results are much less favorable to unbiasedness hypothesis. For precious metals and copper and lead, we strongly reject the null that β=1 at all three horizons. For the these other base metals, while we cannot reject that β=1, due to large standard errors. Finally, both corn and soybean futures have β close to 1, while wheat has β<1. Excepting oil and base metals, futures tend to outperform a random walk specification in out of sample forecasts.

futures, energy, petroleum, natural gas, heating oil, gasoline, precious metals, base metals, agricultural commodities, forecasting, efficient markets hypothesis, backwardation, contango

Abstract:
This paper assesses both the support for and the properties of informational rigidities faced by agents. Specifically, we track the impulse responses of mean forecast errors and disagreement among agents after exogenous structural shocks. Our key contribution is to document that in response to structural shocks, mean forecasts fail to completely adjust on impact, leading to statistically and economically significant deviations from the null of full information: the half life of forecast errors is roughly between 6 months and a year. Importantly, the dynamic process followed by forecast errors following structural shocks is consistent with the predictions of models of informational rigidities. We interpret this finding as providing support for the recent expansion of research into models of informational rigidities. In addition, we document several stylized facts about the conditional responses of forecast errors and disagreement among agents that can be used to differentiate between some of the models of informational rigidities recently proposed. We use a variety of structural shocks, expectation surveys, and robustness checks to establish these facts about informational rigidities.

expectations, information rigidity, survey forecasts

Abstract:
This paper uses three different surveys of economic forecasts to assess both the support for and the properties of informational rigidities faced by agents. Specifically, we track the impulse responses of mean forecast errors and disagreement among agents after exogenous structural shocks. Our key contribution is to document that in response to structural shocks, mean forecasts fail to completely adjust on impact, leading to statistically and economically significant deviations from the null of full information: the half life of forecast errors is roughly between 6 months and a year. Importantly, the dynamic process followed by forecast errors following structural shocks is consistent with the predictions of models of informational rigidities. We interpret this finding as providing support for the recent expansion of research into models of informational rigidities. In addition, we document several stylized facts about the conditional responses of forecast errors and disagreement among agents that can be used to differentiate between some of the models of informational rigidities recently proposed.

Abstract:
We document a novel empirical phenomenon: both the US Federal Reserve and the European Central Bank appear to set interest rates partly in response to regional disparities in unemployment rates. This result is remarkably robust - particularly for the US - even after controlling for a wide variety of factors, including the central bank's information set and a battery of explanatory variables. Furthermore, including measures of interregional unemployment dispersion improves the precision of the estimates of the central banks' responses to aggregate inflation and unemployment rates. Moreover, inclusion of the variance of unemployment across regions brings each bank's policies with respect to macroeconomic aggregates into alignment with each other. We propose three models in which central bank policymaking is influenced by disparities across regions. Testing specific implications of these models suggests that each bank's approach to policy may differ in fundamental ways.

Regional Heterogeneity, Monetary Policy, Taylor Rules

Abstract:
With positive trend inflation, the Taylor principle is not enough to guarantee a determinate equilibrium. We provide new theoretical results on restoring determinacy in New Keynesian models with positive trend inflation and combine these with new empirical findings on the Federal Reserve’s reaction function before and after the Volcker disinflation to find that 1) while the Fed likely satisfied the Taylor principle in the pre-Volcker era, the US economy was still subject to self-fulfilling fluctuations in the 1970s, 2) the US economy moved from indeterminacy to determinacy during the Volcker disinflation, and 3) the switch from indeterminacy to determinacy was due to the changes in the Fed’s response to macroeconomic variables and the decline in trend inflation during the Volcker disinflation.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
With positive trend inflation, the Taylor principle is not enough to guarantee a determinate equilibrium. We provide new theoretical results on restoring determinacy in New Keynesian models with positive trend inflation and combine these with new empirical findings on the Federal Reserve’s reaction function before and after the Volcker disinflation to find that 1) while the Fed likely satisfied the Taylor principle in the pre-Volcker era, the US economy was still subject to self-fulfilling fluctuations in the 1970s, 2) the US economy moved from indeterminacy to determinacy during the Volcker disinflation, and 3) the switch from indeterminacy to determinacy was due to the changes in the Fed’s response to macroeconomic variables and the decline in trend inflation during the Volcker disinflation.

Trend inflation, Determinacy, Great Moderation, Monetary Policy

Abstract:
We consider a DSGE model in which firms follow one of four price-setting regimes: sticky prices, sticky-information, rule-of-thumb, or full-information flexible prices. The parameters of the model, including the fractions of each type of firm, are estimated by matching the moments of the observed variables of the model to those found in the data. We find that sticky-price firms and sticky-information firms jointly account for over 80% of firms in the model, with the rest largely accounted for by rule-of-thumb firms. We compare the performance of our hybrid model to pure sticky-price and sticky-information models along various dimensions, including monetary policy implications.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.