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Non-Linearities, State-Dependent Prices and the Transmission Mechanism of Monetary Policy

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  • Guido Ascari
  • Timo Haber

Abstract

A sticky price theory of the transmission mechanism of monetary policy shocks based on state-dependent pricing yields two testable implications that do not hold in time-dependent models. First, large monetary policy shocks should yield proportionally larger initial responses of the price level. Second, in a high trend inflation regime, the response of the price level to monetary policy shocks should be larger and real effects smaller. Our analysis provides evidence supporting these non-linear effects in the response of the price level in aggregate US data, indicating state-dependent pricing as an important feature of the transmission mechanism of monetary policy.

Suggested Citation

  • Guido Ascari & Timo Haber, 2022. "Non-Linearities, State-Dependent Prices and the Transmission Mechanism of Monetary Policy," The Economic Journal, Royal Economic Society, vol. 132(641), pages 37-57.
    • Handle: RePEc:oup:econjl:v:132:y:2022:i:641:p:37-57.
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