Does Inflation Adjust Faster to Aggregate Technology Shocks than to Monetary Policy Shocks?

Posted: 28 Nov 2008 Last revised: 6 Oct 2009

See all articles by Luigi Paciello

Luigi Paciello

Einaudi Institute for Economics and Finance (EIEF)

Date Written: September 1, 2009

Abstract

This paper studies U.S. inflation adjustment speed to aggregate technology shocks and to monetary policy shocks in a Bayesian VAR model with a large number of macroeconomic variables. According to the model estimated on the 1960-2007 sample, inflation adjusts much faster to aggregate technology shocks than to monetary policy shocks. These results are robust to different identification assumptions and measures of aggregate prices. However, by separately estimating the model over the pre- and post-1980 periods, this paper further shows that inflation adjusts much faster to technology shocks than to monetary policy shocks in the post-1980 period, but not in the pre-1980 period. This evidence challenges existing models of sticky prices.

Keywords: Bayesian VAR, price responsiveness, monetary policy shocks, technology shocks

JEL Classification: C11, C13, C33, C53

Suggested Citation

Paciello, Luigi, Does Inflation Adjust Faster to Aggregate Technology Shocks than to Monetary Policy Shocks? (September 1, 2009). Available at SSRN: https://ssrn.com/abstract=1260865

Luigi Paciello (Contact Author)

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Due Macelli, 73
Rome, 00187
Italy

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