The Price Puzzle Revisited: Can the Cost Channel Explain a Rise in Inflation after a Monetary Policy Shock?
53 Pages Posted: 5 Jul 2007
Date Written: July 2007
This paper explores whether the cost channel solves the price puzzle. We set-up a New Keynesian DSGE model and estimate it for the euro area by adopting a minimum distance approach. Our findings suggest that - under certain parameter restrictions which are not rejected by the data - the cost channel helps to generate an initial rise of inflation after a monetary contraction.
Keywords: price puzzle, New Keynesian model, cost channel, minimum distance estimation
JEL Classification: C51, E31, E32
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