Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/282527 
Year of Publication: 
2023
Series/Report no.: 
CESifo Working Paper No. 10839
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
We show that the impact of supply and monetary policy shocks on consumer prices is state-dependent. First, we let the data determine two inflation regimes and find that they are characterized by high and low inflation volatility. We then identify upstream supply shocks using instrumental variables based on data outliers in the producer price series. Such shocks exhibit a more substantial and more persistent effect on downstream prices during periods of elevated inflation volatility (State 2) compared to phases of more stable consumer price growth (State 1). Similarly, monetary policy shocks are more effective in State 2. Exogenously differentiating regimes by the level of inflation or the shock size does not reveal state dependency. The evidence supports a model in which producers invest in price flexibility. This model predicts that stricter inflation targeting reduces price flexibility and, consequently, the pass-through of all shocks to inflation, beyond the standard channel that affects demand.
Subjects: 
inflation regimes
supply shocks
monetary policy
cost pass-through
producer prices
JEL: 
E31
E52
E32
Document Type: 
Working Paper
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