Testing the Structural Interpretation of the Price Puzzle with a Cost Channel Model

37 Pages Posted: 27 Nov 2009

See all articles by Efrem Castelnuovo

Efrem Castelnuovo

University of Melbourne - Department of Economics

Date Written: November 25, 2009

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

JEL Classification: E30, E52

Suggested Citation

Castelnuovo, Efrem, Testing the Structural Interpretation of the Price Puzzle with a Cost Channel Model (November 25, 2009). Bank of Finland Research Discussion Paper No. 20/2009. Available at SSRN: https://ssrn.com/abstract=1513202 or http://dx.doi.org/10.2139/ssrn.1513202

Efrem Castelnuovo (Contact Author)

University of Melbourne - Department of Economics ( email )

Melbourne, 3010
Australia

HOME PAGE: http://https://sites.google.com/site/efremcastelnuovo/home

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