Testing the Structural Interpretation of the Price Puzzle with a Cost‐Channel Model
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"Testing the Structural Interpretati..." refers background or methods in this paper
...We veri…ed the convergence towards the target posterior distribution via the Brooks and Gelman (1998) convergence checks....
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...We verified the convergence towards the target posterior distribution via the Brooks and Gelman (1998) convergence checks....
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5,169 citations
"Testing the Structural Interpretati..." refers methods in this paper
...Useful references for these heuristic clustering methods are Anderberg (1993), Kaufman and Rousseeuw (1990) and Hartigan (1975). Unfortunately, although the traditional clustering methods are appealing, none of them addresses the issue of how many clusters there should be....
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...Useful references for these heuristic clustering methods are Anderberg (1993), Kaufman and Rousseeuw (1990) and Hartigan (1975)....
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...In economics cluster analysis has been applied to EU data by several authors, notably Jacquemin and Sapir (1995), Artis and Zhang (1998a), Artis and Zhang (1998b) and most recently by Camacho, Perez-Quiros, and Saiz (2006) with interesting results. The cluster analysis done in the 1990s on the EU has largely corroborated the evidence on suitability for membership of EMU gained from the aforementioned empirical methods used in the OCA literature. The methodology has also started to appear more frequently in the economics literature, with Galbraith and Jiaging (1999), Honohan (2000), Frühwirth-Schnatter and Kaufman (2004) and Camacho, Perex-Quiros, and Saiz (2006) applying different cluster analysis methods to various economic problems and data....
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...In economics cluster analysis has been applied to EU data by several authors, notably Jacquemin and Sapir (1995), Artis and Zhang (1998a), Artis and Zhang (1998b) and most recently by Camacho, Perez-Quiros, and Saiz (2006) with interesting results....
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4,938 citations
"Testing the Structural Interpretati..." refers background in this paper
...Possibly, this is so because inflation expectations are strongly influenced by interest rate smoothing (Woodford, 2003b), then the demand channel is stronger when some policy inertia is allowed for....
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...Possibly, this is so because inflation expectations are strongly influenced by a gradualmonetary policy conduct (Woodford, 2003b)....
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...Macroeconomic textbooks suggest that inflation should react negatively to such a monetary policy move (Woodford, 2003a; Galı̀, 2008)....
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Frequently Asked Questions (11)
Q2. What are the future works mentioned in the paper "Testing the structural interpretation of the price puzzle with a cost channel model" ?
The authors plan to participate to this exciting agenda with further investigations in the close future. Justiniano, A — Primiceri, G ( 2008a ) Potential and Natural Output.
Q3. What is the initial VCV matrix of the forecast errors in the Kalman filter?
The initial VCV matrix of the forecast errors in the Kalman filter is set to be equal to the unconditional variance of the state variables.
Q4. What is the effect of the interest rate on the marginal costs of firms?
the interest rate paid on borrowings enters firms’ marginal costs and influences firms’ price setting, so giving a structural role to the presence of the policy rate in the new-Keynesian Phillips curve.
Q5. How many log-points does the marginal likelihood of a model with cost channel read?
In fact, the marginal likelihood of a model estimated under φR = 0, ρε > 0 reads −506.60, a dramatic deterioration of the model fit — around 83 log-points.
Q6. What is the effect of the inverse of the labor supply elasticity to real wage fluctuations?
The higher η, the lower the labor supply elasticity to real wage fluctuations (ie the higher the slope of the labor supply), the higher the real wage and marginal cost drop after a policy shock, the more intense the negative push on inflation exerted by the demand channel.
Q7. What are the other parameters of the US macroeconomic dynamics in the 1970s?
The remaining parameters, cost channel parameter included, display stability over subsamples, with the exception of habit formation,12Clarida, Galì, and Gertler (2000), Lubik and Schorfheide (2004), Boivin and Giannoni (2006), and Mavroeidis (2009) offer support to the ‘indeterminacy’ hypothesis to explain the US macroeconomic dynamics in the 1970s.
Q8. Why is the inflation reaction less likely to be influenced by the cost channel?
this is so because inflation expectations are strongly influenced by the monetary policy conduct given the latter’s persistence (Woodford, 1999; Woodford, 2003b), then an increase in marginal costs driven by borrowing costs is less inflationary than it would be under a less firm policy conduct.
Q9. How does the model work against the interest rate smoothing?
the marginal likelihood of the model with no interest rate smoothing clearly works against it, reading −680.15, ie a deterioration of about 257 log-points.
Q10. What was the inverse of the Hessian of the posterior distribution evaluated at the posterior mode?
In particular, the inverse of the Hessian of the posterior distribution evaluated at the posterior mode was used to define the variance-covariance matrix of the chain.
Q11. What is the reason why the price puzzle is not solved?
Working with a model in which they simulate a policy shift resembling the one estimated for the US case, Castelnuovo and Surico (2009) show that a standard trivariate VAR estimated on pseudo-data may indeed produce a price puzzle when, in fact, the model generating such pseudo-data suggests a negative inflation reaction to a policy tightening.