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Large shocks travel fast

Author

Listed:
  • Alberto Cavallo
  • Francesco Lippi
  • Ken Miyahara

Abstract

We leverage the inflation upswing of 2022 and various granular data sets 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 setup 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.

Suggested Citation

  • Alberto Cavallo & Francesco Lippi & Ken Miyahara, 2024. "Large shocks travel fast," Working Papers 198, Peruvian Economic Association.
    • Handle: RePEc:apc:wpaper:198
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    References listed on IDEAS

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    Cited by:

    1. Miescu, Mirela & Mumtaz, Haroon & Theodoridis, Konstantinos, 2024. "Non-linear Dynamics of Oil Supply News Shocks," Cardiff Economics Working Papers E2024/18, Cardiff University, Cardiff Business School, Economics Section.
    2. Michael Reiter & Adrian Wende, 2024. "Generalized Rotemberg Price-Setting," CESifo Working Paper Series 11297, CESifo.

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    More about this item

    Keywords

    sticky prices; supply shocks; passthrough; generalized hazard function;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L66 - Industrial Organization - - Industry Studies: Manufacturing - - - Food; Beverages; Cosmetics; Tobacco
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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