Large Shocks Travel Fast

Alberto Cavallo, Francesco Lippi and Ken Miyahara ()

No 31659, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We leverage the inflation upswing of 2022 and various granular datasets 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 set up 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.

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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