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Price puzzle in a small open New Keynesian model

Syed Zahid Ali and Sajid Anwar ()

The Quarterly Review of Economics and Finance, 2018, vol. 69, issue C, 29-42

Abstract: Some recent studies have highlighted the role of exchange rate pass-through in resolving the price puzzle. In this paper, based on both closed form solution and calibration of a dynamic stochastic general equilibrium (DSGE) model, we show that even if the exchange rate pass-through was not present, factors such as (i) a sufficiently high degree of openness of the economy, (ii) the cost of price adjustment, (iii) a high interest rate elasticity of aggregate demand, or (iv) an anticipated monetary shock (i.e., the news shock) can solve the price puzzle. Furthermore, we show that our main results continue to hold in the case of both a simple Taylor rule as well as a combination of monetary policy regimes.

Keywords: Price puzzle; Cost channel; Exchange rate pass-through; News shock; Rational expectations (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:quaeco:v:69:y:2018:i:c:p:29-42