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:	Álvarez, Fernando, Neumeyer, Pablo Andrés
Formato:	Artículo
Lenguaje:	English
Publicado:	Banco Central de Chile 2020
Materias:	INFLACIÓN
Acceso en línea:	https://hdl.handle.net/20.500.12580/4879
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spelling	oai-20.500.12580-48792021-04-24T11:52:35Z The passthrough of large-cost shocks in an inflationary economy Álvarez, Fernando Neumeyer, Pablo Andrés INFLACIÓN 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. 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. 2020-09-29T16:44:58Z 2020-09-29T16:44:58Z 2020 Artículo 978-956-7421-67-1 978-956-7421-68-8 (pdf) https://hdl.handle.net/20.500.12580/4879 en Series on Central Banking Analysis and Economic Policies no. 27 Serie Banca Central, análisis y políticas económicas, no. 27 Attribution-NonCommercial-NoDerivs 3.0 Chile http://creativecommons.org/licenses/by-nc-nd/3.0/cl/ .pdf Sección o Parte de un Documento p. 07-48 application/pdf Banco Central de Chile
institution	Banco Central
collection	Banco Central
language	English
topic	INFLACIÓN
spellingShingle	INFLACIÓN Álvarez, Fernando Neumeyer, Pablo Andrés The passthrough of large-cost shocks in an inflationary economy
description	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.
format	Artículo
author	Álvarez, Fernando Neumeyer, Pablo Andrés
author_facet	Álvarez, Fernando Neumeyer, Pablo Andrés
author_sort	Álvarez, Fernando
title	The passthrough of large-cost shocks in an inflationary economy
title_short	The passthrough of large-cost shocks in an inflationary economy
title_full	The passthrough of large-cost shocks in an inflationary economy
title_fullStr	The passthrough of large-cost shocks in an inflationary economy
title_full_unstemmed	The passthrough of large-cost shocks in an inflationary economy
title_sort	passthrough of large-cost shocks in an inflationary economy
publisher	Banco Central de Chile
publishDate	2020
url	https://hdl.handle.net/20.500.12580/4879
work_keys_str_mv	AT alvarezfernando thepassthroughoflargecostshocksinaninflationaryeconomy AT neumeyerpabloandres thepassthroughoflargecostshocksinaninflationaryeconomy AT alvarezfernando passthroughoflargecostshocksinaninflationaryeconomy AT neumeyerpabloandres passthroughoflargecostshocksinaninflationaryeconomy
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The passthrough of large-cost shocks in an inflationary economy

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