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Are State and Time Dependent Models Really Different?

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  • Fernando E. Alvarez
  • Francesco Lippi
  • Juan Passadore

Abstract

Yes, but only for large monetary shocks. In particular, we show that in a broad class of models where shocks have continuous paths, the propagation of a monetary impulse is independent of the nature of the sticky price friction when shocks are small. The propagation of large shocks instead depends on the nature of the friction: the impulse response of inflation to monetary shocks is independent of the shock size in time-dependent models, while it is non-linear in state-dependent models. We use data on exchange rate devaluations and inflation for a panel of countries over 1974-2014 to test for the presence of state dependent decision rules. We present some evidence of a non-linear effect of exchange rate changes on prices in a sample of flexible-exchange rate countries with low inflation. We discuss the dimensions in which this finding is robust and the ones in which it is not.

Suggested Citation

  • Fernando E. Alvarez & Francesco Lippi & Juan Passadore, 2016. "Are State and Time Dependent Models Really Different?," NBER Working Papers 22361, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:22361
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    Cited by:

    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. Cohen, Samuel N. & Henckel, Timo & Menzies, Gordon D. & Muhle-Karbe, Johannes & Zizzo, Daniel J., 2019. "Switching cost models as hypothesis tests," Economics Letters, Elsevier, vol. 175(C), pages 32-35.
    3. Hobijn, Bart & Nechio, Fernanda & Shapiro, Adam Hale, 2021. "Using Brexit to identify the nature of price rigidities," Journal of International Economics, Elsevier, vol. 130(C).
    4. Anatoli Colicev & Joris Hoste & Jozef Konings, 2019. "Exchange Rate Pass-through after a Large Depreciation," Working Papers 201902, University of Liverpool, Department of Economics.
    5. Fernando Álvarez & Pablo Andrés Neumeyer, 2020. "The Passthrough of Large-cost Shocks in an Inflationary Economy," Central Banking, Analysis, and Economic Policies Book Series, in: Gonzalo Castex & Jordi Galí & Diego Saravia (ed.),Changing Inflation Dynamics,Evolving Monetary Policy, edition 1, volume 27, chapter 2, pages 007-048, Central Bank of Chile.
    6. 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.
    7. 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.
    8. Timo Henckel & Gordon D. Menzies & Peter G. Moffatt & Daniel J. Zizzo, 2022. "Belief adjustment: a double hurdle model and experimental evidence," Experimental Economics, Springer;Economic Science Association, vol. 25(1), pages 26-67, February.
    9. Isaac Baley & Andrés Blanco, 2021. "Aggregate Dynamics in Lumpy Economies," Econometrica, Econometric Society, vol. 89(3), pages 1235-1264, May.
    10. Lasha Kavtaradze & Manouchehr Mokhtari, 2018. "Factor Models And Time†Varying Parameter Framework For Forecasting Exchange Rates And Inflation: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 32(2), pages 302-334, April.
    11. Martina Jašová & Richhild Moessner & Elöd Takáts, 2019. "Exchange Rate Pass-Through: What Has Changed Since the Crisis?," International Journal of Central Banking, International Journal of Central Banking, vol. 15(3), pages 27-58, September.
    12. Olivier Wang & Iván Werning, 2022. "Dynamic Oligopoly and Price Stickiness," American Economic Review, American Economic Association, vol. 112(8), pages 2815-2849, August.
    13. Harald Uhlig, 2016. "Comment on "Jump-Starting the Euro Area Recovery: Would a Rise in Core Fiscal Spending Help the Periphery?"," NBER Chapters, in: NBER Macroeconomics Annual 2016, Volume 31, pages 183-197, National Bureau of Economic Research, Inc.
    14. Diego Daruich & Julian Kozlowski, 2018. "Uniform Pricing Within and Across Regions: New Evidence from Argentina," Working Papers 2018-10, Federal Reserve Bank of St. Louis.
    15. Marco Bonomo & Carlos Carvalho & Oleksiy Kryvtsov & Sigal Ribon & Rodolfo Rigato, 2020. "Multi-Product Pricing: Theory and Evidence from Large Retailers in Israel," Staff Working Papers 20-12, Bank of Canada.
    16. Fernando Alvarez & Francesco Lippi, 2016. "Price plans and the real effects of monetary policy," 2016 Meeting Papers 549, Society for Economic Dynamics.
    17. Gasteiger, Emanuel & Grimaud, Alex, 2020. "Price setting frequency and the Phillips Curve," ECON WPS - Working Papers in Economic Theory and Policy 03/2020, TU Wien, Institute of Statistics and Mathematical Methods in Economics, Economics Research Unit.
    18. Huw D. Dixon & Christian Grimme, 2019. "State-Dependent or Time-Dependent Pricing? New Evidence from a Monthly Firm-Level Survey: 1980-2017," CESifo Working Paper Series 7842, CESifo.
    19. 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.
    20. Raphael Auer & Ariel Burstein & Sarah M. Lein, 2021. "Exchange Rates and Prices: Evidence from the 2015 Swiss Franc Appreciation," American Economic Review, American Economic Association, vol. 111(2), pages 652-686, February.
    21. Fernando Alvarez & Francesco Lippi & Luigi Paciello, 2018. "Monetary shocks in models with observation and menu costs," Journal of the European Economic Association, European Economic Association, vol. 16(2), pages 353-382.
    22. Guido Ascari & Timo Haber, 2022. "Non-Linearities, State-Dependent Prices and the Transmission Mechanism of Monetary Policy [Dynamic effects of persistent shocks]," The Economic Journal, Royal Economic Society, vol. 132(641), pages 37-57.
    23. Timo Henckel & Gordon Menzies & Peter Moffat & Daniel J. Zizzo, 2017. "Sticky Belief Adjustment: A Double Hurdle Model and Experimental Evidence," Working Paper Series 40, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
    24. Carvalho, Carlos & Kryvtsov, Oleksiy, 2021. "Price selection," Journal of Monetary Economics, Elsevier, vol. 122(C), pages 56-75.

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    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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