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Testing the Structural Interpretation of the Price Puzzle with a Cost‐Channel Model *
Author(s) -
Castelnuovo Efrem
Publication year - 2012
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/j.1468-0084.2011.00658.x
Subject(s) - economics , monetary policy , shock (circulatory) , dynamic stochastic general equilibrium , inflation (cosmology) , vector autoregression , new keynesian economics , econometrics , replicate , variety (cybernetics) , monetary economics , macroeconomics , statistics , mathematics , medicine , physics , theoretical physics
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.