Non-Linearities, State-Dependent Prices and the Transmission Mechanism of Monetary Policy

2021/06/17 by Guido Ascari, Timo Haber
Economics, Econometrics and Finance · #Monetary Policy and Economic Impact #Market Dynamics and Volatility #Financial Markets and Investment Strategies

paper · pdf · doi:10.1093/ej/ueab049

Abstract

Abstract A sticky price theory of the transmission mechanism of monetary policy shocks based on state-dependent pricing yields two testable implications that do not hold in time-dependent models. First, large monetary policy shocks should yield proportionally larger initial responses of the price level. Second, in a high trend inflation regime, the response of the price level to monetary policy shocks should be larger and real effects smaller. Our analysis provides evidence supporting these non-linear effects in the response of the price level in aggregate US data, indicating state-dependent pricing as an important feature of the transmission mechanism of monetary policy.

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