The passthrough of large-cost shocks in an inflationary economy
This paper surveys and modestly extends the theory of menu-cost models of the behavior of the aggregate price level after large-cost shocks. It does so in the context of an economy with a high underlying rate of inflation. It concentrates on the effect of large permanent and unexpected increases...
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| Autores principales: | , |
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| Formato: | Artículo |
| Lenguaje: | English |
| Publicado: |
Banco Central de Chile
2020
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| Materias: | |
| Acceso en línea: | https://hdl.handle.net/20.500.12580/4879 |
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| Sumario: | This paper surveys and modestly extends the theory of menu-cost
models of the behavior of the aggregate price level after large-cost
shocks. It does so in the context of an economy with a high underlying
rate of inflation. It concentrates on the effect of large permanent and
unexpected increases in the nominal price of inputs on the price level at
different horizons. We use a simple theoretical model where increases
in nominal cost will increase aggregate prices one for one in the long
run. We study how the nominal rigidities implied by a menu cost
distribute the increases in the price level between the impact effect
immediately after the cost shock and the subsequent price adjustment
until the price catches up with its long-run increase. In other words,
we study the passthrough of large-cost shocks at different horizons.
We pay particular attention to the role of the underlying inflation rate
as well as to the role of the size of the cost shock, since both elements
are important to determine the dynamics of aggregate prices. |
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