Monetary Policy, Inflation Expectations and the Price Puzzle

22 Pages Posted: 17 Nov 2010

See all articles by Efrem Castelnuovo

Efrem Castelnuovo

University of Melbourne - Department of Economics

Paolo Surico

London Business School - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: 2010-02-23

Abstract

This article re-examines the VAR evidence on the price puzzle and proposes a new theoretical interpretation. Using actual data and two identification strategies based on zero restrictions and model-consistent sign restrictions, we find that the positive response of prices to a monetary policy shock is historically limited to the sub-samples that are typically associated with a weak interest rate response to inflation. Using pseudo data generated by a sticky price model of the US economy, we then show that the structural VARs are capable of reproducing the price puzzle only when monetary policy is passive. The omission in the VARs of a variable capturing expected inflation is found to account for the price puzzle observed in simulated and actual data.

Suggested Citation

Castelnuovo, Efrem and Surico, Paolo, Monetary Policy, Inflation Expectations and the Price Puzzle (2010-02-23). The Economic Journal, Vol. 120, Issue 549, pp. 1262-1283, December 2010. Available at SSRN: https://ssrn.com/abstract=1710332 or http://dx.doi.org/10.1111/j.1468-0297.2010.02368.x

Efrem Castelnuovo (Contact Author)

University of Melbourne - Department of Economics ( email )

Melbourne, 3010
Australia

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

Paolo Surico

London Business School - Department of Economics ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

HOME PAGE: http://sites.google.com/site/paolosurico

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

HOME PAGE: http://sites.google.com/site/paolosurico

Register to save articles to
your library

Register

Paper statistics

Downloads
2
Abstract Views
388
PlumX Metrics