Price Puzzle in a Small Open New Keynesian Model

Syed Zahid Ali; Sajid Anwar

doi:10.1016/j.qref.2017.12.001

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Price Puzzle in a Small Open New Keynesian Model

Journal article

Open access

Peer reviewed

Price Puzzle in a Small Open New Keynesian Model

Syed Zahid Ali and Sajid Anwar

Quarterly Review of Economics and Finance, Vol.69, pp.29-42

2018

DOI: https://doi.org/10.1016/j.qref.2017.12.001

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Abstract

price puzzle

cost channel

exchange rate pass-through

news shock

rational expectations

Some recent studies have highlighted the role of exchange rate pass-through in resolving the price puzzle. In this paper, based on both closed form solution and calibration of a dynamic stochastic general equilibrium (DSGE) model, we show that even if the exchange rate pass-through was not present, factors such as (i) a sufficiently high degree of openness of the economy, (ii) the cost of price adjustment, (iii) a high interest rate elasticity of aggregate demand, or (iv) an anticipated monetary shock (i.e., the news shock) can solve the price puzzle. Furthermore, we show that our main results continue to hold in the case of both a simple Taylor rule as well as a combination of monetary policy regimes.

Details

Title: Price Puzzle in a Small Open New Keynesian Model
Authors: Syed Zahid Ali (Corresponding Author) - Lahore University of Management Sciences, Pakistan
Sajid Anwar (Corresponding Author) - University of the Sunshine Coast - Faculty of Arts, Business and Law
Publication details: Quarterly Review of Economics and Finance, Vol.69, pp.29-42
Publisher: Elsevier BV
Date published: 2018
DOI: 10.1016/j.qref.2017.12.001
ISSN: 1062-9769; 1878-4259; 1062-9769
Organisation Unit: School of Business and Creative Industries; Indigenous and Transcultural Research Centre; University of the Sunshine Coast, Queensland; USC Business School - Legacy
Language: English
Record Identifier: 99451101302621
Output Type: Journal article
Research Statement: false

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