December 2024
Article
American Economic Review: Insights

Large Shocks Travel Fast

By: Alberto Cavallo, Francesco Lippi and Ken Miyahara

Format:Print
| Pages:17

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 pre-shock 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.

Keywords

System Shocks; Price; Cost; Inflation and Deflation; Financial Institutions

Citation

Cavallo, Alberto, Francesco Lippi, and Ken Miyahara. "Large Shocks Travel Fast." American Economic Review: Insights 6, no. 4 (December 2024): 558–574.