Testing the Structural Interpretation of the Price Puzzle with a Cost Channel Model
37 Pages Posted: 27 Nov 2009
Date Written: November 25, 2009
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: Suggested Citation