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  4. December 2024
  5. Large Shocks Travel Fast

American Economic Review: Insights

ISSN 2640-205X (Print) | ISSN 2640-2068 (Online)

Large Shocks Travel Fast

  • Alberto Cavallo
  • Francesco Lippi
  • Ken Miyahara
American Economic Review: Insights
vol. 6, no. 4, December 2024
(pp. 558–74)
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Abstract

We document a sizeable increase in the frequency of price adjustments following the large energy shocks of 2022. We use a tractable New Keynesian model, calibrated to the preshock data, to interpret such a pattern. The calibration highlights the state dependence of firms' decisions: prices are adjusted rapidly when markups are misaligned. In the model, a large cost shock triggers a swift increase in the frequency of price adjustments, causing a rapid pass-through from costs to prices. Time-dependent models, such as the Calvo model, miss this frequency response, failing to capture the sudden inflation surge after a large shock.

Citation

Cavallo, Alberto, Francesco Lippi, and Ken Miyahara. 2024. "Large Shocks Travel Fast." American Economic Review: Insights, 6 (4): 558–74. DOI: 10.1257/aeri.20230454

Additional Materials

JEL Classification

  • D22 Firm Behavior: Empirical Analysis
  • E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
  • E31 Price Level; Inflation; Deflation
  • L11 Production, Pricing, and Market Structure; Size Distribution of Firms
  • L66 Food; Beverages; Cosmetics; Tobacco; Wine and Spirits
  • Q43 Energy and the Macroeconomy