Hooman Karami; Maryam Hematy
Volume 20, Issue 65 , February 2016, , Pages 129-157
Abstract
In this paper, following Maćkowiak, Moench and Wiederholt (2009), the reaction of sectoral price indexes to aggregate and idiosyncratic shocks has been evaluated using Bayesian Dynamic Factor Model. The separation of the reaction of prices to these two types of shocks has been done in order to identify ...
Read More
In this paper, following Maćkowiak, Moench and Wiederholt (2009), the reaction of sectoral price indexes to aggregate and idiosyncratic shocks has been evaluated using Bayesian Dynamic Factor Model. The separation of the reaction of prices to these two types of shocks has been done in order to identify the pricing model that is more compatible with Iranian economy. In case of existence of any significant difference in speeds and sizes of price reaction with respect to these shocks, we can conclude that some of the conventional price setting models such as Calvo could not be able to explain the differences. Therefore, for the purpose of explaining the price setting behavior in Iran, alternative pricing models should be evaluated. The results of this study clearly show that there is a significant difference between the reaction of price indexes to aggregate and sectoral shocks. Based on the results, rational inattention model of Mackowiak and Wiederholt (2009a) is more consistent with the stylized facts of Iran’s economy in comparison with the conventional pricing models.
Maryam Hematy; Ahmad Reza Jalali Naini
Volume 16, Issue 49 , February 2012, , Pages 205-239
Abstract
Achieving price stability is known as one of the tasks and objectives of policy makers especially in central banks. In order to implement inflation targeting policy, the information relating to the response of prices to monetary policy shocks is essential for monetary policy makers. Most studies analyze ...
Read More
Achieving price stability is known as one of the tasks and objectives of policy makers especially in central banks. In order to implement inflation targeting policy, the information relating to the response of prices to monetary policy shocks is essential for monetary policy makers. Most studies analyze the response of aggregate price level like CPI or consumption deflator to monetary shocks. Moreover, a limited number of studies that examine the effect of monetary shocks on disaggregate prices use vector auto regression models for the analysis. The results of these studies show that some disaggregated prices increase slightly in response to a contractionary monetary shocks. This finding which is inconsistent with the standard theory is known as the "price puzzle" in literature. In this paper we use a factor Augmented VAR framework to examine the impulse response function of 12 categories of CPI to one standard error in money base growth rate in Iran. Our two main findings are: 1) monetary shocks have a lagged effect on disaggregated prices and most prices response to a monetary shock with a considerable delay. 2) There is a substantial difference amongst 12 CPI sub-categories in response to an increase in monetary base growth rate. However, the impulse response functions of disaggregated prices are not statistically significant based on bootstrap confidence interval. Contrary to existing studies based on standard VAR model, by using FAVAR approach, we also find that price responses don’t display a price puzzle in the case of Iran.
