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Faculty of Economics

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Ascari, G. and Haber, T.

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

The Economic Journal

Vol. 132(641) pp. 35-37 (2022)

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.

Keywords: Sticky prices, state-dependent pricing, monetary policy

JEL Codes: E30, E52, C22

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