Sticky prices and the transmission mechanism of monetary policy: A minimal test of New Keynesian models

Guido Ascari and Timo Haber

No 869, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: This paper proposes a minimal test of two basic empirical predictions that ag-gregate data should exhibit if sticky prices were the key transmission mechanism of monetary policy, as implied by the benchmark DSGE-New Keynesian models. First, large monetary policy shocks should yield proportionally larger initial re-sponses of the price level and smaller real effects on output. Second, in a high trend inflation regime, prices should be more flexible, and thus the real effects of monetary policy shocks should be smaller and the response of the price level larger. Our analysis provides some statistically significant evidence in favor of a sticky price theory of the transmission mechanism of monetary policy shocks.

Keywords: Sticky prices; local projections; smooth transition function; time-dependent pricing; state-dependent pricing (search for similar items in EconPapers)
JEL-codes: C22 E30 E52 (search for similar items in EconPapers)
Date: 2019-03-06
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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