IDEAS home Printed from https://ideas.repec.org/a/oup/econjl/v132y2022i641p37-57..html

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

Author

Listed:
  • 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.
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/ej/ueab049
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Barthélémy Bonadio & Andreas M Fischer & Philip Sauré, 2020. "The Speed of Exchange Rate Pass-Through," Journal of the European Economic Association, European Economic Association, vol. 18(1), pages 506-538.
    2. Michael Dotsey & Robert G. King & Alexander L. Wolman, 1999. "State-Dependent Pricing and the General Equilibrium Dynamics of Money and Output," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(2), pages 655-690.
    3. Emi Nakamura & Dawit Zerom, 2010. "Accounting for Incomplete Pass-Through," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 77(3), pages 1192-1230.
    4. Kim, Soyoung & Roubini, Nouriel, 2000. "Exchange rate anomalies in the industrial countries: A solution with a structural VAR approach," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 561-586, June.
    5. Silvana Tenreyro & Gregory Thwaites, 2016. "Pushing on a String: US Monetary Policy Is Less Powerful in Recessions," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(4), pages 43-74, October.
    6. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
    7. Olivier Coibion, 2012. "Are the Effects of Monetary Policy Shocks Big or Small?," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(2), pages 1-32, April.
    8. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June.
    9. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148, Elsevier.
    10. Christina D. Romer & David H. Romer, 2010. "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," American Economic Review, American Economic Association, vol. 100(3), pages 763-801, June.
    11. Christina D. Romer & David H. Romer, 2004. "A New Measure of Monetary Shocks: Derivation and Implications," American Economic Review, American Economic Association, vol. 94(4), pages 1055-1084, September.
    12. J. B. Taylor & Harald Uhlig (ed.), 2016. "Handbook of Macroeconomics," Handbook of Macroeconomics, Elsevier, edition 1, volume 2, number 2.
    13. Bhattarai, Saroj & Schoenle, Raphael, 2014. "Multiproduct firms and price-setting: Theory and evidence from U.S. producer prices," Journal of Monetary Economics, Elsevier, vol. 66(C), pages 178-192.
    14. Whitney Newey & Kenneth West, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    15. Uhlig, Harald, 2005. "What are the effects of monetary policy on output? Results from an agnostic identification procedure," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 381-419, March.
    16. Nakov, Anton & Petit, Borja & Costain, James, 2018. "Monetary policy implications of state-dependent prices and wages," CEPR Discussion Papers 13398, C.E.P.R. Discussion Papers.
    17. Barakchian, S. Mahdi & Crowe, Christopher, 2013. "Monetary policy matters: Evidence from new shocks data," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 950-966.
    18. Fernando Alvarez & Francesco Lippi, 2020. "Temporary Price Changes, Inflation Regimes, and the Propagation of Monetary Shocks," American Economic Journal: Macroeconomics, American Economic Association, vol. 12(1), pages 104-152, January.
    19. Peter J. Klenow & Oleksiy Kryvtsov, 2008. "State-Dependent or Time-Dependent Pricing: Does it Matter for Recent U.S. Inflation?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(3), pages 863-904.
    20. Ben S. Bernanke & Jean Boivin & Piotr Eliasz, 2005. "Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(1), pages 387-422.
    21. Fernando Alvarez & Francesco Lippi, 2014. "Price Setting With Menu Cost for Multiproduct Firms," Econometrica, Econometric Society, vol. 82(1), pages 89-135, January.
    22. Mark Gertler & Peter Karadi, 2015. "Monetary Policy Surprises, Credit Costs, and Economic Activity," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 44-76, January.
    23. Fernando Alvarez & Hervé Le Bihan & Francesco Lippi, 2016. "The Real Effects of Monetary Shocks in Sticky Price Models: A Sufficient Statistic Approach," American Economic Review, American Economic Association, vol. 106(10), pages 2817-2851, October.
    24. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(4), pages 1415-1464.
    25. Fernando Alvarez & Francesco Lippi & Juan Passadore, 2017. "Are State- and Time-Dependent Models Really Different?," NBER Macroeconomics Annual, University of Chicago Press, vol. 31(1), pages 379-457.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Guido Ascari & Timo Haber, 2019. "Sticky prices and the transmission mechanism of monetary policy: A minimal test of New Keynesian models," Economics Series Working Papers 869, University of Oxford, Department of Economics.
    2. Ramey, V.A., 2016. "Macroeconomic Shocks and Their Propagation," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 71-162, Elsevier.
    3. Lee, Seungyoon & Park, Jongwook, 2022. "Identifying monetary policy shocks using economic forecasts in Korea," Economic Modelling, Elsevier, vol. 111(C).
    4. James Cloyne & Patrick Hürtgen, 2016. "The Macroeconomic Effects of Monetary Policy: A New Measure for the United Kingdom," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(4), pages 75-102, October.
    5. Ambrogio Cesa-Bianchi & Gregory Thwaites & Alejandro Vicondoa, 2016. "Monetary Policy Transmission in an Open Economy: New Data and Evidence from the United Kingdom," Discussion Papers 1612, Centre for Macroeconomics (CFM), revised Aug 2016.
    6. Cesa-Bianchi, Ambrogio & Thwaites, Gregory & Vicondoa, Alejandro, 2020. "Monetary policy transmission in the United Kingdom: A high frequency identification approach," European Economic Review, Elsevier, vol. 123(C).
    7. Klenow, Peter J. & Malin, Benjamin A., 2010. "Microeconomic Evidence on Price-Setting," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 6, pages 231-284, Elsevier.
    8. Champagne, Julien & Sekkel, Rodrigo, 2018. "Changes in monetary regimes and the identification of monetary policy shocks: Narrative evidence from Canada," Journal of Monetary Economics, Elsevier, vol. 99(C), pages 72-87.
    9. Thore Schlaak & Malte Rieth & Maximilian Podstawski, 2023. "Monetary policy, external instruments, and heteroskedasticity," Quantitative Economics, Econometric Society, vol. 14(1), pages 161-200, January.
    10. Arefeva, Alina & Arefyev, Nikolay, 2025. "Playing by the Taylor rules or sticking to Friedman’s policy: A new approach to monetary policy identification," Economic Modelling, Elsevier, vol. 143(C).
    11. Robin Braun & Ralf Brüggemann, 2017. "Identification of SVAR Models by Combining Sign Restrictions With External Instruments," Working Paper Series of the Department of Economics, University of Konstanz 2017-07, Department of Economics, University of Konstanz.
    12. Nuno Palma, 2019. "The Real Effects of Monetary Expansions: Evidence from a Large-Scale Historical Natural Experiment," Economics Discussion Paper Series 1904, Economics, The University of Manchester, revised Aug 2021.
    13. Fernando Alvarez & Hervé Le Bihan & Francesco Lippi, 2016. "The Real Effects of Monetary Shocks in Sticky Price Models: A Sufficient Statistic Approach," American Economic Review, American Economic Association, vol. 106(10), pages 2817-2851, October.
    14. Stock, J.H. & Watson, M.W., 2016. "Dynamic Factor Models, Factor-Augmented Vector Autoregressions, and Structural Vector Autoregressions in Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 415-525, Elsevier.
    15. Frache, Serafin & Lluberas, Rodrigo & Turen, Javier, 2024. "Belief-dependent pricing decisions," Economic Modelling, Elsevier, vol. 132(C).
    16. Rüth, Sebastian K., 2020. "Shifts in monetary policy and exchange rate dynamics: Is Dornbusch's overshooting hypothesis intact, after all?," Journal of International Economics, Elsevier, vol. 126(C).
    17. Andersson, Fredrik N. G. & Kilman, Josefin, 2021. "A Study of the Romer and Romer Monetary Policy Shocks Using Revised Data," Working Papers 2021:19, Lund University, Department of Economics.
    18. Chen, Zhengyang & Valcarcel, Victor J., 2021. "Monetary transmission in money markets: The not-so-elusive missing piece of the puzzle," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 131, pages 1-16.
    19. Chen, Zhengyang & Valcarcel, Victor J., 2025. "Modeling inflation expectations in forward-looking interest rate and money growth rules," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 170, pages 1-21.
    20. Mark Bils & Peter J. Klenow & Benjamin A. Malin, 2012. "Reset Price Inflation and the Impact of Monetary Policy Shocks," American Economic Review, American Economic Association, vol. 102(6), pages 2798-2825, October.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:econjl:v:132:y:2022:i:641:p:37-57.. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press or the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/resssea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.