Authors:

  • Alberto Cavallo

Excerpt

September 2023, Paper: "We leverage the inflation upswing of 2022 and various granular datasets to identify robust pricesetting patterns following a large supply shock. We show that the frequency of price changes increases dramatically after a large shock. We set up 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 dynamic."