Large Shocks Travel Fast

By: Alberto Cavallo, Francesco Lippi and Ken Miyahara

Format:Print
| Language:English
| Pages:25

Abstract

We leverage the inflation upswing of 2022 and various granular datasets to identify robust price-setting 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 dynamics.