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

28 Pages Posted: 3 May 2012

See all articles by Efrem Castelnuovo

Efrem Castelnuovo

University of Melbourne - Department of Economics

Date Written: June 2012

Abstract

We estimate a variety of small‐scale new‐Keynesian DSGE models with the cost channel to assess their ability to replicate the ‘price puzzle’, i.e. the inflationary impact of a monetary policy shock typically arising in vector autoregression (VAR) analysis. To correctly identify the monetary policy shock, we distinguish between a standard policy rate shifter and a shock to ‘trend inflation’, i.e. the time‐varying inflation target set by the Fed. Our estimated models predict a negative inflation reaction to a monetary policy tightening. We offer a discussion of the possible sources of mismatch between the VAR evidence and our own.

JEL Classification: E30, E52

Suggested Citation

Castelnuovo, Efrem, Testing the Structural Interpretation of the Price Puzzle with a Cost‐Channel Model (June 2012). Oxford Bulletin of Economics and Statistics, Vol. 74, Issue 3, pp. 425-452, 2012. Available at SSRN: https://ssrn.com/abstract=2050241 or http://dx.doi.org/10.1111/j.1468-0084.2011.00658.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

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