Testing the structural interpretation of the price puzzle with a cost channel model

Efrem Castelnuovo

No 20/2009, Bank of Finland Research Discussion Papers from Bank of Finland

Abstract: We estimate a new-Keynesian DSGE model with the cost channel to assess its ability to replicate the price puzzle ie the inflationary impact of a monetary policy shock typically arising in VAR analysis. In order to correctly identify the monetary policy shock, we distinguish between a standard policy rate shifter and a shock to trend inflation ie the time-varying inflation target set by the Fed. While offering some statistical support to the cost channel, our estimated model clearly implies a negative inflation reaction to a tightening of monetary policy. We offer a discussion of the possible sources of mismatch between the VAR evidence and our own.

Date: 2009
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Related works:
Journal Article: Testing the Structural Interpretation of the Price Puzzle with a Cost-Channel Model (2012)
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