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Price puzzle in a small open New Keynesian model

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  • Ali, Syed Zahid
  • Anwar, Sajid

Abstract

Some recent studies have highlighted the role of exchange rate pass-through in resolving the price puzzle. In this paper, based on both closed form solution and calibration of a dynamic stochastic general equilibrium (DSGE) model, we show that even if the exchange rate pass-through was not present, factors such as (i) a sufficiently high degree of openness of the economy, (ii) the cost of price adjustment, (iii) a high interest rate elasticity of aggregate demand, or (iv) an anticipated monetary shock (i.e., the news shock) can solve the price puzzle. Furthermore, we show that our main results continue to hold in the case of both a simple Taylor rule as well as a combination of monetary policy regimes.

Suggested Citation

  • Ali, Syed Zahid & Anwar, Sajid, 2018. "Price puzzle in a small open New Keynesian model," The Quarterly Review of Economics and Finance, Elsevier, vol. 69(C), pages 29-42.
    • Handle: RePEc:eee:quaeco:v:69:y:2018:i:c:p:29-42
    DOI: 10.1016/j.qref.2017.12.001
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    More about this item

    Keywords

    Price puzzle; Cost channel; Exchange rate pass-through; News shock; Rational expectations;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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