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Large Shocks Travel Fast

Author

Listed:
  • Alberto Cavallo
  • Francesco Lippi
  • Ken Miyahara

Abstract

We leverage the inflation upswing of 2022 and various granular datasets to identify robust price-setting patterns following a large supply shock. We show that the frequency of price changes increases dramatically after a large shock. We set up a parsimonious New Keynesian model and calibrate it to fit the steady-state data before the shock. The model features a significant component of state-dependent decisions, implying that large cost shocks incite firms to react more swiftly than usual, resulting in a rapid pass-through to prices -- large shocks travel fast. Understanding this feature is crucial for interpreting recent inflation dynamics.

Suggested Citation

  • Alberto Cavallo & Francesco Lippi & Ken Miyahara, 2023. "Large Shocks Travel Fast," NBER Working Papers 31659, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31659
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    Cited by:

    1. repec:ces:ceswps:_12212 is not listed on IDEAS
    2. Hall, Robert E. & Kudlyak, Marianna, 2025. "The active role of the natural rate of unemployment," Research in Economics, Elsevier, vol. 79(4).
    3. Cameron Haas & Mateo Hoyos & Emiliano Libman & Guilherme K. Martins & Arslan Razmi, 2025. "Monetary Shocks and Inflation: Global Evidence from Trilemma-Based Identification," Working Papers DTE 650, CIDE, División de Economía.
    4. Rebelo, Sergio & Santana, Miguel & Teles, Pedro, 2025. "Behavioral sticky prices," Journal of Monetary Economics, Elsevier, vol. 155(S).
    5. Michael Reiter & Adrian Wende, 2024. "Generalized Rotemberg Price-Setting," CESifo Working Paper Series 11297, CESifo.
    6. Lenza, Michele & Moutachaker, Inès & Paredes, Joan, 2025. "Density forecasts of inflation: A quantile regression forest approach," European Economic Review, Elsevier, vol. 178(C).
    7. Ken Miyahara, 2025. "On the cyclicality of durable consumption responses," Working Papers 210, Peruvian Economic Association.
    8. Stefano Neri & Cristina Conflitti & Alessandro Lin, 2026. "The awakening of inflation and the return of the Phillips curve in the euro area," Temi di discussione (Economic working papers) 1525, Bank of Italy, Economic Research and International Relations Area.
    9. Zhang, Tao & Tang, Ke & Liu, Taoxiong & Jiang, Tingfeng, 2025. "High frequency online inflation and term structure of interest rates: Evidence from China," Journal of Empirical Finance, Elsevier, vol. 83(C).
    10. Stefano Neri, 2025. "Energy prices, inflation and the ECB's monetary policy during the 2021-22 energy crisis," Temi di discussione (Economic working papers) 1481, Bank of Italy, Economic Research and International Relations Area.
    11. Alessandri, Piergiorgio & Jordà, Òscar & Venditti, Fabrizio, 2025. "Decomposing the monetary policy multiplier," Journal of Monetary Economics, Elsevier, vol. 152(C).
    12. Pablo Cuba-Borda & Jean-Paul L'Huillier, 2025. "Inflation is a Supply Phenomenon," Working Papers 137, Brandeis University, Department of Economics and International Business School.
    13. Erwan Gautier & Cristina Conflitti & Daniel Enderle & Ludmila Fadejeva & Alex Grimaud & Eduardo Gutiérrez & Valentin Jouvanceau & Jan-Oliver Menz & Alari Paulus & Pavlos Petroulas & Pau Roldan-Blanco , 2026. "Consumer price stickiness in the euro area during an inflation surge," Working Papers 2608, Banco de España.
    14. Alberto Cavallo & Oleksiy Kryvtsov, 2024. "Price Discounts and Cheapflation during the Post-Pandemic Inflation Surge," NBER Chapters, in: Inflation in the COVID Era and Beyond, National Bureau of Economic Research, Inc.
    15. Karadi, Peter & Nakov, Anton & Nuño, Galo & Pasten, Ernesto & Thaler, Dominik, 2025. "Why monetary policy should crack down harder during high inflation," Research Bulletin, European Central Bank, vol. 130.
    16. Bušs, Ginters & Traficante, Guido, 2025. "The Return of Inflation: Look-Through Policy Under Incomplete Information," Dynare Working Papers 85, CEPREMAP.
    17. Elisa Guglielminetti & Michele Loberto, 2025. "Inflation expectations and price-setting decisions: insights from the housing market," Temi di discussione (Economic working papers) 1507, Bank of Italy, Economic Research and International Relations Area.
    18. Gregory Phelan & Thomas Kohler & Jean-Paul L'Huillier & Maximilian Weiss, 2025. "Why Do Supply Disruptions Lead to Inflation?," Department of Economics Working Papers 2025_104, Department of Economics, Williams College.
    19. Elisa Guglielminetti & Alessandro Lin & Andrea Tiseno, 2025. "The many shades of uncertainty and monetary policy," Questioni di Economia e Finanza (Occasional Papers) 978, Bank of Italy, Economic Research and International Relations Area.
    20. Frédéric Vinas, 2025. "Oil Shocks and their Impact on Corporate Profitability, Productivity, and Credit Risk: Firm-Level Evidence Over Two Decades," Working papers 989, Banque de France.
    21. Petrella, Ivan & Santoro, Emiliano & Winkelmann, Yannik, 2025. "Inflation and price flexibility," European Economic Review, Elsevier, vol. 178(C).
      • Petrella Ivan & Santoro Emiliano & Winkelmann Yannik, 2025. "Inflation and Price Flexibility," Working papers 099, Department of Economics, Social Studies, Applied Mathematics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino.
    22. Nickel, Christiane & Kilponen, Juha & Moral-Benito, Enrique & Koester, Gerrit & Ciccarelli, Matteo & Enders, Almira & Holton, Sarah & Landau, Bettina & Venditti, Fabrizio & Bobeica, Elena & Brand, Cla, 2025. "A strategic view on the economic and inflation environment in the euro area," Occasional Paper Series 371, European Central Bank.
    23. Miescu, Mirela & Mumtaz, Haroon & Theodoridis, Konstantinos, 2024. "Non-linear Dynamics of Oil Supply News Shocks," Cardiff Economics Working Papers E2024/18, Cardiff University, Cardiff Business School, Economics Section.

    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L66 - Industrial Organization - - Industry Studies: Manufacturing - - - Food; Beverages; Cosmetics; Tobacco
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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