Large shocks travel fast

Alberto Cavallo, Francesco Lippi and Ken Miyahara ()

No 18413, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We leverage the inflation upswing of 2022 and various granular data sets to identify robust price setting patterns following a large supply shock. We show that the frequency of price changes increases dramatically after a large shock. We setup a parsimonious New Keynesian model and calibrate it to fit the steady state data before the shock. The model features a significant component of state-dependent decisions, implying that large cost shocks incite firms to react more swiftly than usual, resulting in a rapid pass- through to prices—large shocks travel fast. Understanding this feature is crucial for interpreting recent inflation dynamics.

Keywords: Sticky prices; Cost passthrough; State-dependent pricing (search for similar items in EconPapers)
JEL-codes: E5 (search for similar items in EconPapers)
Date: 2023-09
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Related works:
Journal Article: Large Shocks Travel Fast (2024)
Working Paper: Large shocks travel fast (2024)
Working Paper: Large Shocks Travel Fast (2023)
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