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
Reuters polls show that most Americans blame President Trump for the recent U.S. government shutdown.
Olivia London

2019-01-05 11:39:00 Saturday ET

Reuters polls show that most Americans blame President Trump for the recent U.S. government shutdown.

Reuters polls show that most Americans blame President Trump for the recent U.S. government shutdown. President Trump remains adamant about having to shut d

+See More
U.S. inflation has become sustainably less than the 2% policy target in recent years.
Jonah Whanau

2019-08-03 09:28:00 Saturday ET

U.S. inflation has become sustainably less than the 2% policy target in recent years.

U.S. inflation has become sustainably less than the 2% policy target in recent years. As Harvard macro economist Robert Barro indicates, U.S. inflation has

+See More
Treasury Secretary Steve Mnuchin has released a 147-page report on U.S. financial deregulation.
Peter Prince

2017-05-25 08:35:00 Thursday ET

Treasury Secretary Steve Mnuchin has released a 147-page report on U.S. financial deregulation.

Treasury Secretary Steve Mnuchin has released a 147-page report on financial deregulation under the Trump administration. This financial deregulation seeks

+See More
Treasury Secretary Steven Mnuchin welcomes a weak U.S. dollar amid pervasive fears of an open trade war between America and China.
James Campbell

2018-01-15 07:35:00 Monday ET

Treasury Secretary Steven Mnuchin welcomes a weak U.S. dollar amid pervasive fears of an open trade war between America and China.

Treasury Secretary Steven Mnuchin welcomes a weak U.S. dollar amid pervasive fears of an open trade war between America and China. At the World Economic For

+See More
American unemployment declines to the 50-year historical low level of 3.5% with moderate job growth.
Chanel Holden

2019-11-19 09:33:00 Tuesday ET

American unemployment declines to the 50-year historical low level of 3.5% with moderate job growth.

American unemployment declines to the 50-year historical low level of 3.5% with moderate job growth. Despite a sharp slowdown in U.S. services and utilities

+See More
Federal Reserve raises the interest rate to the target range of 2.25% to 2.5% as of December 2018.
Charlene Vos

2018-12-22 14:38:00 Saturday ET

Federal Reserve raises the interest rate to the target range of 2.25% to 2.5% as of December 2018.

Federal Reserve raises the interest rate to the target range of 2.25% to 2.5% as of December 2018. Fed Chair Jerome Powell highlights the dovish interest ra

+See More