Unmoored expectations and the price puzzle

Anna Florio

No 154, DEM Working Papers Series from University of Pavia, Department of Economics and Management

Abstract: We explore the possibility that the price puzzle - the positive response of prices to a negative monetary policy shock- arises in the presence of unmoored expectations. Looking at the pre-Great Recession period, employing a VAR analysis, we compare the behavior of prices after a monetary policy shock in countries with clearly defined nominal anchors (Canada, New Zealand, Sweden, United Kingdom, Switzerland and EMU) to their behavior in countries that, at that time, did not possess any such anchor (Japan and United States). While in this last group we find evidence of a price puzzle, in the first, starting from the period when this anchor was set, we do not find such a perverse dynamic. We argue that those countries characterised by clearly defined nominal anchors, having anchored inflation expectations, have managed to rule out the persistent increase in the price level.

Keywords: VAR; Price Puzzle; Monetary Policy Shocks. (search for similar items in EconPapers)
Pages: 27 pages
Date: 2018-03
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:pav:demwpp:demwp0154

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