Research Discussion Papers, Bank of Finland
Testing the structural interpretation of the price puzzle with a cost channel model
Abstract: We estimate a new-Keynesian DSGE model with the cost
channel to assess its ability to replicate the price puzzle ie the
inflationary impact of a monetary policy shock typically arising in VAR
analysis. In order to correctly identify the monetary policy shock, we
distinguish between a standard policy rate shifter and a shock to trend
inflation ie the time-varying inflation target set by the Fed. While
offering some statistical support to the cost channel, our estimated model
clearly implies a negative inflation reaction to a tightening of monetary
policy. We offer a discussion of the possible sources of mismatch between
the VAR evidence and our own.
Keywords: cost channel; inflation dynamics; price puzzle; trend inflation; (follow links to similar papers)
JEL-Codes: E30; E52; (follow links to similar papers)
34 pages, September 7, 2009
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- This paper is forthcoming as:
Castelnuovo, Efrem, 'Testing the structural interpretation of the price puzzle with a cost channel model', Oxford Bulletin of Economics and Statistics.
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