Non-Linearities, State-Dependent Prices and the Transmission Mechanism of Monetary Policy

Guido Ascari and Timo Haber

The Economic Journal, 2022, vol. 132, issue 641, 37-57

Abstract: A sticky price theory of the transmission mechanism of monetary policy shocks based on state-dependent pricing yields two testable implications that do not hold in time-dependent models. First, large monetary policy shocks should yield proportionally larger initial responses of the price level. Second, in a high trend inflation regime, the response of the price level to monetary policy shocks should be larger and real effects smaller. Our analysis provides evidence supporting these non-linear effects in the response of the price level in aggregate US data, indicating state-dependent pricing as an important feature of the transmission mechanism of monetary policy.

Date: 2022
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