# Research — Basil Halperin

# Research

## Job market paper

**Optimal monetary policy under menu costs** (with Daniele Caratelli)

We analytically characterize optimal monetary policy in a multisector economy with menu costs and show that inflation and output should move inversely following sectoral shocks. That is, after negative productivity shocks, inflation should be allowed to rise, and vice versa. In a baseline parameterization, optimal policy stabilizes nominal wages. This *nominal wage targeting* contrasts with inflation targeting, the optimal policy prescribed by the textbook New Keynesian model in which firms are permitted to adjust their prices only randomly and exogenously. The key intuition is that stabilizing inflation causes shocks to spill over across sectors, needlessly increasing the number of firms that must pay the fixed menu cost of price adjustment compared to optimal policy. Finally, we show in a quantitative model that, following a sectoral shock, nominal wage targeting reduces the welfare loss arising from menu costs by 81% compared to inflation targeting.

## Research

**Transformative AI, existential risk, and asset pricing** (with Trevor Chow and J. Zachary Mazlish)

▸ Abstract
We study the implications of transformative artificial intelligence for asset prices, and in particular, how financial market prices can be used to forecast the arrival of such technology. We take into account the double-edged nature of transformative AI: while advanced AI could lead to a rapid acceleration in economic growth, some researchers are concerned that building a superintelligence misaligned with human values could create an existential risk for humanity. We show that under standard asset pricing theory, either possibility — aligned AI accelerating growth or unaligned AI risking extinction — would predict a large increase in *real interest rates*, due to consumption smoothing. The simple logic is that, under expectations of either rapid future growth or future extinction, agents will save less, increasing real interest rates. We contribute a variety of new empirical evidence confirming that, contrary to some recent work, higher growth expectations cause higher long-term real interest rates, as measured using inflation-linked bonds and rich cross-country survey data on inflation expectations. We conclude that monitoring real interest rates is a promising framework for forecasting AI timelines.

**The ZLB is NBD: 5 theses on the New Keynesian “liquidity trap”**

▸ Abstract
I make five conceptual points about optimal monetary and fiscal policy at the zero lower bound (ZLB) in representative agent New Keynesian models, using the simplest possible version of such a model.

- Monetary policy is typically described as facing a time consistency problem at the zero lower bound; but if ZLB episodes are a
*repeated* game rather than a one-shot game – as is empirically realistic – then the time consistency problem can be easily overcome by reputational effects.
- The ZLB is not special, in terms of the constraint it creates for monetary policy: an
*intra*temporal rigidity, such as the minimum wage or rent control, creates exactly the same kind of constraint on monetary policy as the *inter*temporal rigidity of the ZLB.
- Austerity is stimulus: in the representative agent New Keynesian model, fiscal stimulus works through the
*change* in government spending. Promising to cut future spending – committing to austerity – has precisely the same effect on inflation and the output gap as a decision to raise spending today.
- Fiscal stimulus can be contractionary, when targeted heterogeneously: if fiscal spending is targeted at certain sectors, this can in fact lower inflation and deepen the output gap.
- Fiscal policy faces a time consistency problem at the ZLB, just as monetary policy does.

Overall, I suggest that – in this class of models – the power of monetary policy at the ZLB has been underrated, and the power of fiscal policy has been overrated.

**Competing fiat moneys and nominal rigidities** *[extended abstract]* (with Adam Baybutt and J. Zachary Mazlish)

▸ Abstract
Monetary economics traditionally does not consider a market-based benchmark: when we study trade, we start with a benchmark of free trade; when we study monetary economics, however, we start with a benchmark of central banking. This paper aims to fill that gap. We study competition among unbacked, costless (“fiat”) moneys. First, under flexible prices and perfect competition, there is a first welfare theorem for money: When producers of such moneys have commitment technology — such as blockchain technology — then competition implements the optimum quantity of money. Second, under nominal rigidities where the competing moneys also serve as competing units of account, then competition *can* also implement the equivalent of “optimal monetary policy” to avoid macroeconomic fluctuations, if the competing moneys pay interest. We show how these results are suitably modified when competition is imperfect, and we also extend the model to consider the cases of backed or costly-to-produce moneys.

**Toward an understanding of the economics of apologies: evidence from a large-scale natural field experiment** (with Ben Ho, John A. List, and Ian Muir)

**The Economic Journal** (2022)

[publisher’s version]; [slides]; [Twitter thread]

▸ Abstract
We use a theory of apologies to analyze a nationwide field experiment involving 1.5 million Uber ridesharing consumers who experienced late rides. Several insights emerge. First, apologies are not a panacea: the efficacy of an apology and whether it may backfire depend on how the apology is made. Second, across treatments, money speaks louder than words – the best form of apology is to include a coupon for a future trip. Third, in some cases sending an apology is worse than sending nothing at all, particularly for repeated apologies. For firms, *caveat venditor* should be the rule when considering apologies.

## In progress

**Experimentally reducing menu costs: evidence from one of the world’s largest retailers** (with Daniele Caratelli)

**Decomposing the Great Stagnation: Baumol’s cost disease vs. “ideas are getting harder to find”** (with J. Zachary Mazlish)

**Inelastic markets in the short run, elastic markets in the long run** (with J. Zachary Mazlish)

## Older work

**Monetary Misperceptions: Optimal monetary policy under incomplete information** (2017)

▸ Abstract
Inflation targeting is strictly suboptimal when economic actors have incomplete information about the state of the economy. Nominal income targeting is approximately optimal, and exactly optimal under certain parameterizations. We derive this result in a “Lucas islands” monetary misperceptions model built from, unlike prior work, explicit microfoundations. Agents have knowledge of local productivity and money supply conditions, but must perform a signal extraction problem each period to estimate the aggregate productivity shock and the aggregate money supply shock. Without full information, agents cannot perfectly distinguish between relative price shocks and aggregate shocks, causing monetary policy to affect the real economy. Since the model is built from agents optimizing from first principles, we are able to take a second-order welfare approximation and ask what monetary policy rule is optimal. In contrast to sticky price or sticky information models, inflation and price level targeting are always suboptimal, as price level variation provides useful information to agents. Under log utility, nominal income targeting is optimal.