IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

The Price Puzzle: Fact or Artifact?

  • Efrem Castelnuovo

    ()

    (University of Padua)

  • Paolo Surico

    ()

    (University of Bari and Bank of England)

This paper re-examines the empirical evidence on the price puzzle and proposes a new theoretical interpretation. Using structural VARs and two different identification strategies based on zero restrictions and sign restrictions, we find that the positive response of price to a monetary policy shock is historically limited to the sub-samples associated with a weak central bank response to inflation. These sub-samples correspond to the pre-Volcker period for the US and the pre-inflation targeting regime for the UK. Using a micro-founded New Keynesian monetary policy model for the US economy, we then show that the structural VARs are capable of reproducing the price puzzle on artificial data only when monetary policy is passive and hence multiple equilibria arise. In contrast, this model never generates on impact a positive inflation response to a policy shock. The omission in the VARs of a variable capturing the high persistence of expected inflation under indeterminacy is found to account for the price puzzle observed on actual data.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://economia.unipd.it/sites/decon.unipd.it/files/20060016.pdf
Download Restriction: no

Paper provided by Dipartimento di Scienze Economiche "Marco Fanno" in its series "Marco Fanno" Working Papers with number 0016.

as
in new window

Length: 38 pages
Date of creation: May 2006
Date of revision:
Handle: RePEc:pad:wpaper:0016
Contact details of provider: Postal: via del Santo, 33 - 35122 Padova
Phone: +39 +49 8274210
Fax: +39 +49 827.4211
Web page: http://www.decon.unipd.it/

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Luca Gambetti & Evi Pappa & Fabio Canova, 2005. "The structural dynamics of US output and inflation: What explains the changes?," Economics Working Papers 921, Department of Economics and Business, Universitat Pompeu Fabra.
  2. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June.
  3. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February.
  4. Christopher A. Sims & Tao Zha, 2006. "Were There Regime Switches in U.S. Monetary Policy?," American Economic Review, American Economic Association, vol. 96(1), pages 54-81, March.
  5. Peter N. Ireland, 2005. "Changes in the Federal Reserve’s Inflation Target: Causes and Consequences," Boston College Working Papers in Economics 607, Boston College Department of Economics.
  6. David H. Romer & Christina D. Romer, 2000. "Federal Reserve Information and the Behavior of Interest Rates," American Economic Review, American Economic Association, vol. 90(3), pages 429-457, June.
  7. Sharon Kozicki & P.A. Tinsley, 2003. "Permanent and transitory policy shocks in an empirical macro model with asymmetric information," Research Working Paper RWP 03-09, Federal Reserve Bank of Kansas City.
  8. Gert Peersman, 2005. "What caused the early millennium slowdown? Evidence based on vector autoregressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(2), pages 185-207.
  9. Eric M. Leeper & Jennifer E. Roush, 2003. "Putting 'M' back in Monetary Policy," NBER Working Papers 9552, National Bureau of Economic Research, Inc.
  10. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers.
  11. Jeffrey C. Fuhrer & Glenn D. Rudebusch, 2002. "Estimating the Euler equation for output," Working Papers 02-3, Federal Reserve Bank of Boston.
  12. Thomas Lubik & Frank Schorfheide, 2002. "Testing for Indeterminacy:An Application to U.S. Monetary Policy," Economics Working Paper Archive 480, The Johns Hopkins University,Department of Economics, revised Jun 2003.
  13. Ben S. Bernanke & Jean Boivin & Piotr Eliasz, 2004. "Measuring the effects of monetary policy: a factor-augmented vector autoregressive (FAVAR) approach," Finance and Economics Discussion Series 2004-03, Board of Governors of the Federal Reserve System (U.S.).
  14. Sbordone, A.M., 1998. "Prices and Unit Labor Costs: a New Test of Price Stickiness," Papers 653, Stockholm - International Economic Studies.
  15. Lubik, Thomas A. & Schorfheide, Frank, 2003. "Computing sunspot equilibria in linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 28(2), pages 273-285, November.
  16. Timothy Cogley & Thomas Sargent, . "Drifts and Volatilities: Monetary Policies and Outcomes in the Post WWII US," Working Papers 2133503, Department of Economics, W. P. Carey School of Business, Arizona State University.
  17. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
  18. Ulf Söderström & Paul Söderlind & Anders Vredin, 2005. "New-Keynesian Models and Monetary Policy: A Re-examination of the Stylized Facts," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(3), pages 521-546, 09.
  19. Bernanke, Ben S. & Mihov, Ilian, 1995. "Measuring Monetary Policy," Economics Series 10, Institute for Advanced Studies.
  20. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc.
  21. Giordani, Paolo, 2000. "An alternative explanation of the price puzzle," SSE/EFI Working Paper Series in Economics and Finance 414, Stockholm School of Economics, revised 06 Dec 2000.
  22. Hanson, Michael S., 2004. "The "price puzzle" reconsidered," Journal of Monetary Economics, Elsevier, vol. 51(7), pages 1385-1413, October.
  23. Bennett T. McCallum, 1981. "On Non-Uniqueness in Rational Expectations Models: An Attempt at Perspective," NBER Working Papers 0684, National Bureau of Economic Research, Inc.
  24. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  25. Jeffrey C. Fuhrer, 2000. "Habit Formation in Consumption and Its Implications for Monetary-Policy Models," American Economic Review, American Economic Association, vol. 90(3), pages 367-390, June.
  26. Jean Boivin & Marc P. Giannoni, 2003. "Has Monetary Policy Become More Effective?," NBER Working Papers 9459, National Bureau of Economic Research, Inc.
  27. Thomas A. Lubik, 2005. "Did the Tail Wag the Dog? Fiscal Policy and the Federal Reserve during the Great Inflation," Computing in Economics and Finance 2005 309, Society for Computational Economics.
  28. Arturo Extrella & Jeffrey C. Fuhrer, 1998. "Dynamic inconsistencies: counterfactual implications of a class of rational expectations models," Working Papers 98-5, Federal Reserve Bank of Boston.
  29. Pau Rabanal, 2003. "The Cost Channel of Monetary Policy; Further Evidence for the United States and the Euro Area," IMF Working Papers 03/149, International Monetary Fund.
  30. Jean Boivin & Marc Giannoni, 2002. "Assessing changes in the monetary transmission mechanism: a VAR approach," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 97-111.
  31. Robert G. King, 2000. "The new IS-LM model : language, logic, and limits," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 45-103.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:pad:wpaper:0016. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Raffaele Dei Campielisi)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.