Testing the Structural Interpretation of the Price Puzzle with a Cost-Channel Model
AbstractWe estimate a new-Keynesian DSGE model with the cost channel to assess its ability to replicate the price puzzle ie the inflationary impact of a monetary policy shock typically arising in VAR analysis. In order to correctly identify the monetary policy shock, we distinguish between a standard policy rate shifter and a shock to trend inflation ie the time-varying inflation target set by the Fed. While offering some statistical support to the cost channel, our estimated model clearly implies a negative inflation reaction to a tightening of monetary policy. We offer a discussion of the possible sources of mismatch between the VAR evidence and our own.
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Bibliographic InfoArticle provided by Department of Economics, University of Oxford in its journal Oxford Bulletin of Economics and Statistics.
Volume (Year): 74 (2012)
Issue (Month): 3 (06)
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Other versions of this item:
- Castelnuovo, Efrem, 2009. "Testing the structural interpretation of the price puzzle with a cost channel model," Research Discussion Papers 20/2009, Bank of Finland.
- E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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- Meixing Dai & Qiao Zhang, 2013. "Central bank transparency with the cost channel," Working Papers of BETA 2013-06, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
- Malikane, Christopher, 2012. "Inflation dynamics and the cost channel in emerging markets," MPRA Paper 42688, University Library of Munich, Germany.
- Kapinos, Pavel, 2011. "Forward-looking monetary policy and anticipated shocks to inflation," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 620-633.
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