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The price puzzle revisited: Can the cost channel explain a rise in inflation after a monetary policy shock?

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  • Henzel, Steffen
  • Hülsewig, Oliver
  • Mayer, Eric
  • Wollmershäuser, Timo

Abstract

This paper explores whether the cost channel solves the price puzzle. We set-up a New Keynesian DSGE model and estimate it for the euro area by adopting a minimum distance approach. Our findings suggest that - under certain parameter restrictions which are not rejected by the data - the cost channel helps to generate an initial rise of inflation after a monetary contraction.

Suggested Citation

  • Henzel, Steffen & Hülsewig, Oliver & Mayer, Eric & Wollmershäuser, Timo, 2009. "The price puzzle revisited: Can the cost channel explain a rise in inflation after a monetary policy shock?," Journal of Macroeconomics, Elsevier, vol. 31(2), pages 268-289, June.
  • Handle: RePEc:eee:jmacro:v:31:y:2009:i:2:p:268-289
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    More about this item

    Keywords

    Price puzzle New Keynesian model Cost channel Minimum distance estimation;

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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