Non-Linearities, State-Dependent Prices and the Transmission Mechanism of Monetary Policy | Zendy

Guido Ascari | Zendy; Timo Haber | Zendy

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Non-Linearities, State-Dependent Prices and the Transmission Mechanism of Monetary Policy

Author(s) -

Guido Ascari,

Timo Haber

Publication year - 2021

Publication title -

the economic journal

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 4.683

H-Index - 160

eISSN - 1468-0297

pISSN - 0013-0133

DOI - 10.1093/ej/ueab049

Subject(s) - economics , monetary policy , inflation (cosmology) , monetary economics , mechanism (biology) , monetary transmission mechanism , price level , state dependent , yield (engineering) , inflation targeting , aggregate (composite) , econometrics , credit channel , keynesian economics , philosophy , physics , materials science , epistemology , theoretical physics , metallurgy , composite material

A sticky price theory of the transmission mechanism of monetary policy shocks based on state-dependent pricing yields two testable implications that do not hold in time-dependent models. First, large monetary policy shocks should yield proportionally larger initial responses of the price level. Second, in a high trend inflation regime, the response of the price level to monetary policy shocks should be larger and real effects smaller. Our analysis provides evidence supporting these non-linear effects in the response of the price level in aggregate US data, indicating state-dependent pricing as an important feature of the transmission mechanism of monetary policy.

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