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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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  25. Silvia Fabiani & Martine Druant & Ignacio Hernando & Claudia Kwapil & Bettina Landau & Claire Loupias & Fernando Martins & Thomas Mathä & Roberto Sabbatini & Harald Stahl & Ad Stokman, 2006. "What Firms' Surveys Tell Us about Price-Setting Behavior in the Euro Area," International Journal of Central Banking, International Journal of Central Banking, vol. 2(3), September.
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  35. Rabanal, Pau, 2007. "Does inflation increase after a monetary policy tightening? Answers based on an estimated DSGE model," Journal of Economic Dynamics and Control, Elsevier, vol. 31(3), pages 906-937, March.
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