Working Paper: CEPR ID: DP18413
Authors: Alberto Cavallo; Francesco Lippi; Ken Miyahara
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; statedependent pricing
JEL Codes: E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| large supply shocks (E39) | increase in the frequency of price adjustments (E31) |
| size of the shock (E17) | probability of firms resetting prices (L11) |
| large shocks (E32) | rapid pass-through of costs to consumer prices (E31) |
| size of the shock (E17) | speed of price adjustments (D41) |