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Unmoored expectations and the price puzzle

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  • Anna Florio

    (Department of Management, Economics and Industrial Engineering, Politecnico di Milano)

Abstract

We explore the possibility that the price puzzle - the positive response of prices to a negative monetary policy shock- arises in the presence of unmoored expectations. Looking at the pre-Great Recession period, employing a VAR analysis, we compare the behavior of prices after a monetary policy shock in countries with clearly defined nominal anchors (Canada, New Zealand, Sweden, United Kingdom, Switzerland and EMU) to their behavior in countries that, at that time, did not possess any such anchor (Japan and United States). While in this last group we find evidence of a price puzzle, in the first, starting from the period when this anchor was set, we do not find such a perverse dynamic. We argue that those countries characterised by clearly defined nominal anchors, having anchored inflation expectations, have managed to rule out the persistent increase in the price level.

Suggested Citation

  • Anna Florio, 2018. "Unmoored expectations and the price puzzle," DEM Working Papers Series 154, University of Pavia, Department of Economics and Management.
    • Handle: RePEc:pav:demwpp:demwp0154
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    Keywords

    VAR; Price Puzzle; Monetary Policy Shocks.;
    All these keywords.

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