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