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Are State and Time Dependent Models Really Different?

Fernando E. Alvarez, Francesco Lippi and Juan Passadore

No 22361, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Yes, but only for large monetary shocks. In particular, we show that in a broad class of models where shocks have continuous paths, the propagation of a monetary impulse is independent of the nature of the sticky price friction when shocks are small. The propagation of large shocks instead depends on the nature of the friction: the impulse response of inflation to monetary shocks is independent of the shock size in time-dependent models, while it is non-linear in state-dependent models. We use data on exchange rate devaluations and inflation for a panel of countries over 1974-2014 to test for the presence of state dependent decision rules. We present some evidence of a non-linear effect of exchange rate changes on prices in a sample of flexible-exchange rate countries with low inflation. We discuss the dimensions in which this finding is robust and the ones in which it is not.

JEL-codes: E50 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-net
Date: 2016-06
Note: IFM ME
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Published as Are State- and Time-Dependent Models Really Different? , Fernando Alvarez, Francesco Lippi, Juan Passadore. in NBER Macroeconomics Annual 2016, Volume 31 , Eichenbaum and Parker. 2017

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Journal Article: Are State- and Time-Dependent Models Really Different? (2017) Downloads
Chapter: Are State- and Time-Dependent Models Really Different? (2016)
Working Paper: Are State and Time dependent models really different? (2016) Downloads
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