Working Paper: NBER ID: w22361
Authors: Fernando E. Alvarez; Francesco Lippi; Juan Passadore
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.
Keywords: No keywords provided
JEL Codes: E50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Small monetary shocks (E39) | Inflation (E31) |
| Large monetary shocks (E39) | Inflation (E31) |
| Large shocks (E32) | Price flexibility in SD models (C69) |
| Nature of friction (SD vs. TD) (C69) | Impact effect of monetary shock on inflation (E31) |
| Monetary shocks (E39) | Output responses (Y10) |
| Exchange rate devaluations (F31) | Inflation (E31) |