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inflationdynamics / Research

  • The Macroeconomics of Green Transitions, with Gregor Boehl and Elod Takats

    Abstract: The paper investigates the macroeconomics of an energy transition – a shift from brown to green energy production through carbon taxation. Using a medium-scale DSGE model with energy production sectors and  endogenous innovation in the green energy sector, we show that an energy transition – initiated through a brown energy tax – resembles a large supply side shock, causing a surge in inflation and energy prices and a decline in consumption. Innovation increases the efficiency of green energy production and drives energy prices down in the medium run. We document that monetary policy plays a critical role for the dynamics and pace of the transition, even if the transition is not explicitly part of the policy rule. A monetary policy with less emphasis on inflation stabilization allows for temporarily higher inflation and energy prices, which boosts R&D and innovation, enhancing welfare and accelerating the transition. [Working paper: Green Transition]

  • Carbon Taxes vs. Green Subsidies: Generational Conflicts and Distributional Consequences, with Gregor Boehl

    Abstract: We study the economic implications of a carbon tax vs. green subsidy in a heterogeneous agents New  Keynesian model with brown and green energy production and endogenous green R&D. In the short run, we find that a carbon tax results in a relatively moderate reduction in consumption, as households benefit from the redistribution of tax revenues. Conversely, a subsidy on green energy leads to a significant decline in consumption, higher taxes and higher labor demand, caused by a major shift of resources towards green R&D. All but the top 20% of the wealth distribution strongly oppose the subsidy. However, a generational conflict arises: in the long run, the subsidy leads to higher output and consumption due to increased productivity in the green energy sector, making it more beneficial for future generations. [Working paper: Green policy]

  • Shrinkflation, with Gregor Boehl, revise and resubmit, Review of Economics and Statistics

    Abstract: This paper studies the macroeconomic relevance of product size adjustment–changes in products’ weight or volume–using U.K. CPI microdata from 2012-2023: (i) Product size is relevant for 35$\%$ of the CPI. (ii) Each month, 0.26$\%$ of goods experience size changes (1$\%$ for food, 12$\%$ for chocolate). (iii) 80$\%$ of adjustments are reductions, 90$\%$ of these are “downgrades,” i.e., higher unit price. (iv) Size reducing downgrades (“shrinkflation”) are strongly procyclical; all other alterations are acyclical. (v) Price and size adjustments are unrelated. (vi) The contribution to CPI inflation is small: 0.03 percentage points per month (0.15 for food, 1.2 for chocolate). [Working paper: Shrinkflation]

  • Temporary Sales and Cyclicality

    Abstract: This paper provides novel evidence from U.K. CPI microdata from 1996–2023 on the role of temporary markdowns (”sales”) for aggregate price flexibility. Sales are used as a tool to adjust regular prices: (i) Around 45% of sales occur immediately before or after a regular price increase or decrease, seemingly to divert attention from regular price hikes or to stimulate demand when regular prices are reduced. (ii) These ”strategic sales” are strongly countercyclical, while all other sales are acyclical. (iii) Sales-related regular price increases (decreases) account for 9% (11%) of all regular increases (decreases) and are 1 percentage point (0.6 percentage points) larger in absolute size. Lastly, sales-related price hikes (cuts) tend to flatten (steepen) the slope of the aggregate Phillips curve. [Working paper: Sales]

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