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The Price Puzzle and the Hysteresis Hypothesis: SVEC Analysis for the US Economy

Matteo Deleidi () and Enrico Levrero ()

Review of Political Economy, 2020, vol. 32, issue 1, 22-29

Abstract: This paper shows that monetary policy tightening may lead to an increase in the level of prices. To demonstrate this, we apply SVEC modelling to US monthly data for the 1959–2018 period and endorse the ‘hysteresis hypothesis’ which assumes that monetary policy produces long-lasting effects on unemployment and prices. Contrary to what has been argued by Hanson (2004. ‘The “Price Puzzle” Reconsidered.’ Journal of Monetary Economics 51 (7): 1385–1413) and Castelnuovo and Surico (2010. ‘Monetary Policy, Inflation Expectations and the Price Puzzle.’ The Economic Journal 120 (549): 1262–1283), the phenomenon known as the ‘price puzzle’ or ‘Gibson paradox’ is confirmed both in the pre-1979 and post-1982 periods, showing that the paradox is independent of the active/passive behaviour of the Central Bank. Our findings detect a cost channel of monetary policy demonstrating that a change in the interest rates by monetary authorities may have an effect on income distribution.

Date: 2020
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DOI: 10.1080/09538259.2020.1759244

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