The price puzzle revisited: Can the cost channel explain a rise in inflation after a monetary policy shock?

摘要

This paper explores whether the cost channel solves the price puzzle. We set-up a New Keynesian DSGE model and estimate it for the euro area by adopting a minimum distance approach. Our findings suggest that - under certain parameter restrictions which are not rejected by the data - the cost channel helps to generate an initial rise of inflation after a monetary contraction.Vector autoregressive (VAR) models have become a popular tool for analyzing the effects of monetary policy on the aggregate economy. Despite the popularity, VAR models have been criticized as they occasionally display a controversial result, namely a rise in inflation - that prevails at least temporarily - after a monetary contraction. Sims (1992) originally commented on this phenomenon, which has been labeled the price puzzle (Eichenbaum, 1992). In a VAR model, the presence of a price puzzle casts serious doubts on the possibility of properly identifying a monetary policy shock. Sims (1992) points out that central banks focus on a variety of variables useful for forecasting future inflation that are possibly neglected in the econometric specification,which implies that the unexpected part of a monetary policy shock is insufficiently measured. Consequently, the price puzzle should be mitigated once indicators of nascent inflation - such as commodity prices - are additionally accounted for (Sims, 1992; Leeper et al, 1996; Christiano et al., 1999).