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
The semiconductor microchip demand-supply imbalance remains severe for American big tech.
Amy Hamilton

2022-05-30 09:32:00 Monday ET

The semiconductor microchip demand-supply imbalance remains severe for American big tech.

The new semiconductor microchip demand-supply imbalance remains quite severe for the U.S. tech and auto industries.  Our current fundamental macro a

+See More
White House economic advisor Gary Cohn resigns due to his opposition to President Trump's protectionist tariff stance.
Peter Prince

2018-03-02 12:34:00 Friday ET

White House economic advisor Gary Cohn resigns due to his opposition to President Trump's protectionist tariff stance.

White House top economic advisor Gary Cohn resigns due to his opposition to President Trump's recent protectionist decision on steel and aluminum tariff

+See More
Michael Sandel analyzes what money cannot buy in stark contrast to the free market ideology of capitalism.
Daisy Harvey

2021-08-07 11:33:00 Saturday ET

Michael Sandel analyzes what money cannot buy in stark contrast to the free market ideology of capitalism.

Michael Sandel analyzes what money cannot buy in stark contrast to the free market ideology of capitalism. Michael Sandel (2013)   What money

+See More
Apple provides positive forward guidance on both revenue and profit forecasts for iPhones, iPads, and MacBooks.
James Campbell

2019-02-09 08:33:00 Saturday ET

Apple provides positive forward guidance on both revenue and profit forecasts for iPhones, iPads, and MacBooks.

Apple provides positive forward guidance on both revenue and profit forecasts for iPhones, iPads, and MacBooks. In the Christmas 2018 festive season, MacBoo

+See More
Macro eigenvalue volatility helps predict some recent episodes of high economic policy uncertainty.
James Campbell

2020-09-15 08:38:00 Tuesday ET

Macro eigenvalue volatility helps predict some recent episodes of high economic policy uncertainty.

Macro eigenvalue volatility helps predict some recent episodes of high economic policy uncertainty, recession risk, or rare events such as the recent rampan

+See More
Colin Camerer, George Loewenstein, and Matthew Rabin assess the recent advances in the behavioral economic science.
James Campbell

2021-11-22 14:37:00 Monday ET

Colin Camerer, George Loewenstein, and Matthew Rabin assess the recent advances in the behavioral economic science.

Colin Camerer, George Loewenstein, and Matthew Rabin assess the recent advances in the behavioral economic science. Colin Camerer, George Loewenstei

+See More