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

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

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.

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Paper provided by University of Munich, Department of Economics in its series Munich Reprints in Economics with number 19421.

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Date of creation: 2009
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Publication status: Published in Journal of Macroeconomics 2 31(2009): pp. 268-289
Handle: RePEc:lmu:muenar:19421
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  24. Del Negro, Marco & Schorfheide, Frank & Smets, Frank & Wouters, Rafael, 2005. "On the Fit and Forecasting Performance of New Keynesian Models," CEPR Discussion Papers 4848, C.E.P.R. Discussion Papers.
  25. Andrew Levin & Christopher J. Erceg & Dale W. Henderson, 1999. "Optimal Monetary Policy with Staggered Wage and Price Contracts," Computing in Economics and Finance 1999 1151, Society for Computational Economics.
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