Working Paper: NBER ID: w31659
Authors: Alberto Cavallo; Francesco Lippi; Ken Miyahara
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.
Keywords: No keywords provided
JEL Codes: E05
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| large shocks (E32) | increased frequency of price changes (E30) |
| increased frequency of price changes (E30) | speed of shock propagation (C69) |
| shock size (F35) | probability of price adjustment (E30) |
| large cost shocks (E39) | pricing behavior (D40) |
| large shocks (E32) | rapid price adjustments (D41) |