Wonky as for help.

I was asked in an interview last week how much profits were contributing to inflation. My 'it's complicated' reply is not so satisfying.

And Chair Powell's 'it's not complicated' reply isn't either. So what do our workhorse models say? Are they a blindspot?

1) Is there anything in set up of the final or intermediate goods producing firms in New Keynesian DSGE that would lead them to do:

Price over Volume strategy, which appears to be common now among firms, and is when they sacrifice unit sales (and market share) to higher prices.

Here is the source: www.bloomberg.com/news/articles/2023-03-09/transcript-companies-are-telling-us-the-real-reason-they-r... Many consumers are getting price sensitive, but ones who don't look at price tags are still buying.

Again, my remembering is NK DSGE firms are not strategic and would not do this, but could be wrong, hence asking.

2) Can the NK DSGE get real-world behavior of firms pushing prices as high as possible in anticipation that unit costs fall (energy, shipping, etc.). They won't cut consumer prices, but can raise more slowly and preserve margins?

Btw here's a firm problem in Fed's model:

3) What does this pattern of price setting (in micro CPI data) do to a NK DSGE model. It looks like strategic, as in best time to raise prices is when everyone else is. Again, does NK DSGE do this? And could it be consistent with a price-price spiral? www.aeaweb.org/conference/2023/program/powerpoint/ZkzNkh7Q

This an excellent related thread by @IvanWerning ... though I am asking questions and trying to compare the model to earnings calls and data.
PS He comes down on 'it's complicated' too.

No discussion of profits and inflation can go without a pointer to @IsabellaMWeber. Here's one of many excellent studies:
Though note, she's not unpacking the NK DSGE models.

Ok, that's all. I plan to write more about profits soon, and I don't want to get my facts wrong. I worry that blindspots in the Fed's and 'mainstream' macro's model might be leading us astray right now. But maybe it is buried deep in them?

cc @IvanWerning @ojblanchard1 @GautiEggertsson @mileskimball If you have any thoughts on my questions, it would be most appreciated.