Harvard financial economist Alberto Cavallo empirically shows the recent *Amazon effect* of faster retail price adjustments.

Amy Hamilton

2018-08-23 11:34:00 Thu ET

Harvard financial economist Alberto Cavallo empirically shows the recent *Amazon effect* that online retailers such as Amazon, Alibaba, and eBay etc use fast multi-channel pricing algorithms to determine the retail prices of consumer goods and services. As online purchases now account for a much greater share of total retail sales, the Cavallo study shows that the average duration of American retail prices at Amazon and Walmart significantly declines from 6.5 months to 3.7 months. For central bankers and monetary policymakers who often monitor transitional inflation dynamism from time to time, retail prices are subject to more frequent adjustments with less insulation from common nationwide shocks. Amazon, Alibaba, and eBay etc can now use smart retail-pricing algorithms to take into account energy prices, exchange-rate fluctuations, and other forces that might affect both production and delivery costs.

This important empirical evidence shakes confidence in the conventional notion of sticky prices that sellers often cannot adjust retail prices or menu costs right away in response to systemic changes in aggregate macroeconomic demand and supply. For better monetary policy conduct, the Cavallo study demonstrates that our macro focus needs to move beyond nominal price rigidities in dynamic stochastic general equilibrium (DSGE) sticky-price macro models. Labor market frictions, information asymmetries, and even behavioral inattention costs tend to disappear, or at least decrease in relative importance, as more online retailers apply smart algorithms to price consumer goods and services.

This core implication poses a conceptual challenge to the New Keynesian Phillips Curve (NKPC) that depicts an inverse link between inflation and unemployment at least in the short run. The U.S. economy can revert to the long-run steady state at a faster pace as the Amazon effect induces more frequent retail price adjustments toward dynamic equilibrium values.

U.S. core inflation excludes both food and energy prices and hovers around 2% in mid-2018. As the economy operates near full employment with fresh inflationary momentum, the tech-savvy adoption of smart algorithms can drive fast and volatile retail price adjustments. The Federal Reserve thus has to consider further interest rate hikes to curtail inflation. In light of Trump tax cuts, infrastructure expenditures, and tariffs on imports from China, Canada, Europe, Japan, and Mexico etc, this monetary policy coordination accords with the Federal Reserve's congressional dual mandate of both maximum employment and price stability.

 


If any of our AYA Analytica financial health memos (FHM), blog posts, ebooks, newsletters, and notifications etc, or any other form of online content curation, involves potential copyright concerns, please feel free to contact us at service@ayafintech.network so that we can remove relevant content in response to any such request within a reasonable time frame.

Blog+More

Blackrock asset research director Andrew Ang shares his economic insights into fundamental factors for global asset management.

Apple Boston

2019-07-29 11:33:00 Monday ET

Blackrock asset research director Andrew Ang shares his economic insights into fundamental factors for global asset management.

Blackrock asset research director Andrew Ang shares his economic insights into fundamental factors for global asset management. As Ang indicates in an inter

+See More

Apple settles its 2-year intellectual property lawsuit with Qualcomm by agreeing to a multi-year patent license.

Charlene Vos

2019-05-01 09:27:00 Wednesday ET

Apple settles its 2-year intellectual property lawsuit with Qualcomm by agreeing to a multi-year patent license.

Apple settles its 2-year intellectual property lawsuit with Qualcomm by agreeing to a multi-year patent license with royalty payments to the microchip maker

+See More

U.S. trade envoy Robert Lighthizer proposes America to require regular touchpoints to ensure Sino-U.S. trade deal enforcement.

Daisy Harvey

2019-03-17 14:35:00 Sunday ET

U.S. trade envoy Robert Lighthizer proposes America to require regular touchpoints to ensure Sino-U.S. trade deal enforcement.

U.S. trade rep Robert Lighthizer proposes America to require regular touchpoints to ensure Sino-U.S. trade deal enforcement. America has to maintain the thr

+See More

Climate change and ESG woke capitalism

Dan Rochefort

2022-11-30 09:26:00 Wednesday ET

Climate change and ESG woke capitalism

Climate change and ESG woke capitalism In recent times, the Biden administration has signed into law a $375 billion program to better balance the economi

+See More

Joseph Stiglitz and Andrew Charlton suggest that free trade helps promote better economic development worldwide.

Monica McNeil

2023-07-21 10:30:00 Friday ET

Joseph Stiglitz and Andrew Charlton suggest that free trade helps promote better economic development worldwide.

Joseph Stiglitz and Andrew Charlton suggest that free trade helps promote better economic development worldwide. Joseph Stiglitz and Andrew Charlton (200

+See More

E.U. antitrust regulators impose a fine on Qualcomm for advancing its exclusive microchip deal with Apple.

Fiona Sydney

2018-01-17 05:30:00 Wednesday ET

E.U. antitrust regulators impose a fine on Qualcomm for advancing its exclusive microchip deal with Apple.

European Union antitrust regulators impose a fine on Qualcomm for advancing its key exclusive microchip deal with Apple to block out rivals such as Intel an

+See More