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Large Shocks Travel Fast

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  • 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.

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  • 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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