[Journal:] Swiss Journal of Economics and Statistics [ISSN:] 2235-6282 [Volume:] 148 [Year:] 2012 [Issue:] 1 [Pages:] 57-75
This paper estimates the response of consumer prices to a monetary policy shock in Switzerland. We find that there is no evidence of a price puzzle at the aggregate level. This is because our factor-augmented vector autoregression (FAVAR) avoids misspecification by including more information than a traditional VAR. However, the response is still delayed by at least four quarters, partly because there is a price puzzle in some sectors. In particular, rents tend to rise after a monetary policy tightening because there are legal provisions in Switzerland which link them to interest rates. But durable goods prices also rise, which is consistent with the existence of a cost channel of monetary policy.
monetary policy transmission price puzzle cost channel factor-augmented VAR