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

Many eminent investors suggest that the time may be ripe for a major stock market correction.

Becky Berkman

2017-08-13 09:36:00 Sunday ET

Many eminent investors suggest that the time may be ripe for a major stock market correction.

Several investors and billionaires such as George Soros, Warren Buffett, Carl Icahn, and Howard Marks suggest that the time may be ripe for a major financia

+See More

The Federal Communications Commission (FCC) considers its majority vote to dismantle net neutrality rules.

John Fourier

2017-12-13 06:39:00 Wednesday ET

The Federal Communications Commission (FCC) considers its majority vote to dismantle net neutrality rules.

The Federal Communications Commission (FCC) has decided its majority vote to dismantle rules and regulations of most Internet service providers (ISPs) that

+See More

President Trump threatens to shut down the government if Democrats refuse to help approve $5 billion border wall finance.

Joseph Corr

2018-12-18 10:38:00 Tuesday ET

President Trump threatens to shut down the government if Democrats refuse to help approve $5 billion border wall finance.

President Trump threatens to shut down the U.S. government in 2019 if Democrats refuse to help approve $5 billion public finance for the southern border wal

+See More

Zuckerberg announces his major changes in Facebook's newsfeed algorithm and user authentication.

Becky Berkman

2018-01-07 09:33:00 Sunday ET

Zuckerberg announces his major changes in Facebook's newsfeed algorithm and user authentication.

Zuckerberg announces his major changes in Facebook's newsfeed algorithm and user authentication. Facebook now has to change the newsfeed filter to prior

+See More

Self-Improvement Book Review: The 8th Habit by Stephen Covey.

Monica McNeil

2026-05-02 10:28:00 Saturday ET

Self-Improvement Book Review: The 8th Habit by Stephen Covey.

Stephen Covey recommends the 8th habit for effective team leaders to find their own voices (in addition to the 7 habits of highly effective people). In esse

+See More

The financial crisis of 2008-2009 affects many millennials as they bear the primary costs of college tuition, residential demand, health care, and childcare.

Peter Prince

2019-06-23 08:30:00 Sunday ET

The financial crisis of 2008-2009 affects many millennials as they bear the primary costs of college tuition, residential demand, health care, and childcare.

The financial crisis of 2008-2009 affects many millennials as they bear the primary costs of college tuition, residential demand, health care, and childcare

+See More