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Nominal anchors and the price puzzle

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  • Florio, Anna

Abstract

Looking at the pre-Great Recession period, employing a VAR analysis, we compare the behavior of prices after a monetary policy shock in countries with clearly defined nominal anchors (Australia, Canada, New Zealand, Sweden, Switzerland, United Kingdom and EMU) with their behavior in countries that, at that time, did not possess any such anchor (Japan and United States). While for this last group we find evidence of a price puzzle (i.e. the positive response of prices to a negative monetary policy shock), in the first, once this anchor was set, we do not detect such a perverse dynamic. We argue that in those countries, characterised by clearly defined nominal anchors, the central bank manages to anchor inflation expectations thus ruling out the persistent increase in the price level.

Suggested Citation

  • Florio, Anna, 2018. "Nominal anchors and the price puzzle," Journal of Macroeconomics, Elsevier, vol. 58(C), pages 224-237.
    • Handle: RePEc:eee:jmacro:v:58:y:2018:i:c:p:224-237
    DOI: 10.1016/j.jmacro.2018.09.004
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    4. Ida, Daisuke, 2023. "Cost channel, determinacy, and monetary policy in a two-country new Keynesian model," Economic Modelling, Elsevier, vol. 119(C).

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