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The relative price effects of monetary shocks

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Nathan S. Balke
Mark A. Wynne

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Abstract

We document the response of the individual components of the Producer Price Index (PPI) to commonly used measures of monetary shocks, and show that these responses are at variance with many widely-used “macro” models of monetary non-neutrality. Monetary shocks are shown to have large relative price effects, resulting in an increase in the dispersion of the cross-section distribution of prices. Furthermore, in response to a contractionary (expansionary) monetary shock, a substantial number of prices tend to rise (fall). Most of the existing models of monetary nonneutrality are not capable of replicating these types of relative price responses.

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Paper provided by Federal Reserve Bank of Dallas in its series Working Papers with number 03-06.

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Date of creation: 2003
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Handle: RePEc:fip:feddwp:03-06

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  1. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information Versus Sticky Prices: A Proposal To Replace The New Keynesian Phillips Curve," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1295-1328, November. [Downloadable!] (restricted)
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  2. Hamilton, James D., 1996. "This is what happened to the oil price-macroeconomy relationship," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 215-220, October. [Downloadable!] (restricted)
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  3. Hercowitz, Zvi, 1982. "Money and price dispersion in the united states," Journal of Monetary Economics, Elsevier, vol. 10(1), pages 25-37, July. [Downloadable!] (restricted)
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  4. Davis, Steven J. & Haltiwanger, John, 2001. "Sectoral job creation and destruction responses to oil price changes," Journal of Monetary Economics, Elsevier, vol. 48(3), pages 465-512, December. [Downloadable!] (restricted)
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  5. Fernando Alvarez & Robert E. Lucas, Jr. & Warren E. Weber, 2001. "Interest rates and inflation," Working Papers 609, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  6. Hooker, Mark A., 1996. "What happened to the oil price-macroeconomy relationship?," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 195-213, October. [Downloadable!] (restricted)
  7. Michael Woodford, 2001. "Imperfect Common Knowledge and the Effects of Monetary Policy," NBER Working Papers 8673, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April. [Downloadable!] (restricted)
  9. Marvin Goodfriend & Robert G. King, 1998. "The new neoclassical synthesis and the role of monetary policy," Working Paper 98-05, Federal Reserve Bank of Richmond. [Downloadable!]
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  10. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June. [Downloadable!] (restricted)
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  11. Romer, Christina D. & Romer, David H., 1994. "Monetary policy matters," Journal of Monetary Economics, Elsevier, vol. 34(1), pages 75-88, August. [Downloadable!] (restricted)
  12. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September. [Downloadable!] (restricted)
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  1. Frédérick Demers & Annie De Champlain, 2005. "Forecasting Core Inflation in Canada: Should We Forecast the Aggregate or the Components?," Working Papers 05-44, Bank of Canada. [Downloadable!]
  2. Juliane Scharff & Sven Schreiber, 2008. "Evidence on the effects of inflation on price dispersion under indexation," IMK Working Paper 12-2008, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute. [Downloadable!]
  3. Boivin, Jean & Giannoni, Marc & Mihov, Ilian, 2007. "Sticky Prices and Monetary Policy: Evidence from Disaggregated US Data," CEPR Discussion Papers 6101, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. Jean Boivin & Marc P. Giannoni & Ilian Mihov, 2007. "Sticky Prices and Monetary Policy: Evidence from Disaggregated U.S. Data," CFS Working Paper Series 2007/14, Center for Financial Studies. [Downloadable!]
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