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Large shocks travel fast

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  • Cavallo, Alberto
  • Lippi, Francesco
  • Miyahara, Ken

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

  • Cavallo, Alberto & Lippi, Francesco & Miyahara, Ken, 2023. "Large shocks travel fast," CEPR Discussion Papers 18413, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:18413
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    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.

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    More about this item

    Keywords

    Sticky prices; Cost passthrough; State-dependent pricing;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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