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 InfoPaper provided by Bank of Finland in its series Research Discussion Papers with number 20/2009.
Length: 34 pages
Date of creation: 07 Sep 2009
Date of revision:
Publication status: Forthcoming as Castelnuovo, Efrem, 'Testing the structural interpretation of the price puzzle with a cost channel model' in Oxford Bulletin of Economics and Statistics .
cost channel; inflation dynamics; price puzzle; trend inflation;
Other versions of this item:
- Efrem Castelnuovo, 2012. "Testing the Structural Interpretation of the Price Puzzle with a Cost-Channel Model," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 74(3), pages 425-452, 06.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-10-31 (All new papers)
- NEP-CBA-2009-10-31 (Central Banking)
- NEP-MAC-2009-10-31 (Macroeconomics)
- NEP-MON-2009-10-31 (Monetary Economics)
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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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