Large Shocks Travel Fast

Alberto Cavallo, Francesco Lippi and Ken Miyahara ()

American Economic Review: Insights, 2024, vol. 6, issue 4, 558-74

Abstract: We document a sizeable increase in the frequency of price adjustments following the large energy shocks of 2022. We use a tractable New Keynesian model, calibrated to the preshock data, to interpret such a pattern. The calibration highlights the state dependence of firms' decisions: prices are adjusted rapidly when markups are misaligned. In the model, a large cost shock triggers a swift increase in the frequency of price adjustments, causing a rapid pass-through from costs to prices. Time-dependent models, such as the Calvo model, miss this frequency response, failing to capture the sudden inflation surge after a large shock.

JEL-codes: D22 E12 E31 L11 L66 Q43 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Large shocks travel fast (2024)
Working Paper: Large shocks travel fast (2023)
Working Paper: Large Shocks Travel Fast (2023)
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DOI: 10.1257/aeri.20230454

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