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Testing the structural interpretation of the price puzzle with a cost channel model

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Author Info

  • Castelnuovo, Efrem

    ()
    (University of Padua)

Abstract

We 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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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0920netti.pdf
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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 20/2009.

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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 .
Handle: RePEc:hhs:bofrdp:2009_020

Contact details of provider:
Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Related research

Keywords: cost channel; inflation dynamics; price puzzle; trend inflation;

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Cited by:
  1. 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.
  2. Malikane, Christopher, 2012. "Inflation dynamics and the cost channel in emerging markets," MPRA Paper 42688, University Library of Munich, Germany.
  3. 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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